In Surgicraft Limited v Paradigm Biodevices Inc 2010 EWHC 1291 (Ch.), England’s High Court recently extended the “unilateral mistake” principle earlier enunciated in JJ Huber (Investments) Limited v The Private DIY Co. Limited [1995] NPC 102, to hold that an “entire agreement” clause in a contract does not operate to prevent the court from rectifying an agreement to correct a “common mistake” made by the parties. Now, when there has been either a unilateral or a common mistake and a written contract document does not accurately set forth the parties’ entire agreement, a court may be asked to “rectify” the agreement to correct that mistake and reflect the parties’ actual intentions even if the contract contains an entire agreement clause. (In the United States, this concept is generally referred to in equity as “reformation” of the contract and is similarly based on fraud, mutual mistake of the parties, or unilateral mistake of which the other knew or suspected, and where the resulting contract does not truly express the intention of the parties.

The Facts

In the context of this decision, it is common ground that a “unilateral” mistake occurs when one party has made a mistake and the other party is aware of the mistake but does not alert the counter party to it. A “common” or mutual mistake is when both parties have made the same mistake. The so-called “entire agreement clause” essentially seeks to limit the parties’ rights and obligations concerning the subject matter of the contract to the document itself and to exclude extraneous side agreements and dealings outside the four corners of the written contract document. The issue presented in Surgicraft was whether a “common” mistake made in innocence as opposed to a “unilateral” mistake, such as that involved in JJ Huber involving a suggestion of misrepresentation or sharp dealing, would support rectification.

In Surgicraft, the claimant, a British manufacturer and distributor of orthopaedic and medical products, appointed Paradigm as its exclusive U.S. distributor. After about a year, the initial written contract between them was amended and restated in a new writing. Both of these contracts contained the same entire agreement clause, providing that the written contract document evidenced “the entire understanding between the parties with respect to the subject matter” and a further clause providing that signing the contract evidenced acceptance of all its clauses. Some three years later, the second agreement was terminated by Surgicraft after a change in its control. In the litigation that followed, Paradigm asserted that the original contract contained a mistake that was repeated in the second contract and that it had been the common intention of the parties that Surgicraft would pay Paradigm compensation if Surgicraft terminated the contract as the result of a change in its control, even though the contracts as executed had mistakenly omitted this term. Surgicraft denied that this had been the intention of the parties and further argued that regardless of this dispute of fact as to the parties’ intentions the entire agreement clause precluded rectification either as a matter of law or equity preventing Paradigm from changing positions from those it had taken when it accepted and executed the contracts containing that clause.

Judgment

The High Court held, on the facts in evidence before it, that both parties had indeed made a common mistake as the court was satisfied they had both intended that Paradigm would receive compensation from Surgicraft if Surgicraft underwent a change of control and terminated the contract but they had omitted a term to that effect. The judge rejected Surgicraft’s argument that the entire agreement clause was a bar to rectification. The judge determined that entire agreement clauses are included to limit possible contractual claims arising from discussions or dealings outside the contract; however, where both parties have made a common mistake at the outset in expressing the true and complete agreement they had actually reached, the court may rectify the contract so that it expresses the actual agreement. The Judge further observed that the outcome might have been different if there had been evidence that the entire agreement clause was actually considered and negotiated by the parties to effectuate such a limitation rather than inserted as boilerplate, but there was no evidence of that. Surgicraft had also argued that the entire agree¬ment clause operated as a contractual estoppel barring Paradigm from claiming rectification owing to its prior assent to the entire agreement clause, but the court likewise dismissed this argument as not reflective of the limited purpose of an entire agreement clause.

Key Take-Away

Rectification seeks to rewrite a contract to make the terms consistent with the parties’ original intent. Arguably, this is not inconsistent with the purpose of an entire agreement clause to make what is set out in the writing, or that should have been set out but for mistake, the only enforceable agreement between the parties. Although the Surgicraft decision demonstrates that an entire agreement clause will not ipso facto bar rectification, it must nevertheless be borne in mind that convincing a court to order rectification presents an extraordinarily high hurdle to clear. The burden of proof for establishing common mistake lies with the party requesting rectification and requires convincing evidence both that the contract does not accurately reflect the parties’ mutual original intentions as well as what those intentions actually were at the time. Further, since it appears that the contracts at issue in Surgicraft may have been the product of last minute discussions and changes, the virtue of taking adequate time before execution to ensure that a contract accurately sets forth the entire agreement, when weighed against the considerable risk, time and expense of later having to prove to a court that it is inaccurate or incomplete in some respect, should be obvious. Finally, if an entire agreement or similar contractual integration clause is intended to provide protection or a bar against rectification, it should be specifically negotiated and precisely drafted to effectuate that understanding. Boilerplate may not suffice.