Case in focus: Rectification of a contract

The case

The Borough of Milton Keynes vs Viridor (Community Recycling MK) Limited (No 2) [2017] in the Technology and Construction Court. Before Mr Justice Coulson in the Technology and Construction Court. Judgment delivered 22 February 2017.

The facts

During 2009 the Borough of Milton Keynes invited tenders for a 15-year waste recycling contract. Interested parties were required to submit a tender including an income generating payment mechanism (IGPM) providing for an annual fixed payment to the borough. During May 2009, Viridor submitted a final tender that included an IGPM fixed payment of £500,000 per year “indexed for inflation”. On 22 July 2009 the Borough of Milton Keynes notified Viridor that its tender had been successful. While the contract documents were being prepared, Viridor and the borough agreed some minor revisions to the terms. The formal contract dated 1 October 2009 incorporated an incomplete version of the IGPM that did not include a figure for the fixed payment or mention indexing.

During October 2010, the parties clarified and agreed the contractual mechanism for the profit-sharing amounts to be paid to Viridor. In 2010 and 2011, Viridor paid the borough £500,000 as the IGPM fixed payment but without indexing. In December 2010 the borough submitted but then withdrew an invoice claiming interest on the £500,000.

Following an audit during early 2012, the borough realised that the contract documents were defective. On 15 March 2012, the borough notified Viridor of the position but Viridor would not agree to rectify the contract.

The borough subsequently issued a letter of claim in January 2014 and in April 2015 commenced proceedings claiming rectification of the contract on the grounds of common, or alternatively, unilateral mistake.

Viridor opposed the application on a number of grounds.

The issue

Was it appropriate to order rectification of the contract?

The decision

Viridor’s preliminary submission was that breaches of the Public Contracts Regulations meant that the May 2009 tender could not form the basis of a rectified contract. The judge dismissed this submission on the grounds it had not been pleaded and noted that in any event, Viridor’s final tender complied with the regulations and further, that any non-compliance would not have made any difference to the position on rectification.

The judge had little hesitation in finding that the four requirements for rectification on the grounds of common mistake were satisfied – that is, that the evidence showed that the parties had a common continuing intention as regards the indexing of the £500,000, that there was an outward expression of accord, that the intention continued at the time of execution of the contract, and that the inclusion by mistake of the incomplete IGPM did not reflect the parties’ common intention.

The judge also concluded that the borough’s alternative case in unilateral mistake had been made out: the evidence suggested that Viridor had been aware that an incomplete version of the IGPM was included in the contract documents but failed to draw attention to this and Viridor clearly stood to gain a financial advantage from the omission of the indexing requirement over a 15-year period – something in the region of £300,000, perhaps.

Viridor also contended that the entire agreement clause in the contract precluded rectification. The judge concluded otherwise finding that the entire agreement was to be found in the contract as rectified.

Finally, Viridor argued that the borough’s delay in seeking rectification gave rise to a defence on the basis of laches and/or that there had been acquiescence by the borough to a contract without indexing. The judge noted that in the context of a laches defence to a claim for rectification, the delay is measured from the date at which the claiming party realised the mistake. Here, the borough had raised the issue in March 2012 as soon as it had fully realised the nature of the error. Equally, on the facts there was no evidence to suggest that the borough had clearly agreed to accept a fixed payment without indexation, contrary to the terms of the accepted tender.

Commentary

The judge’s view that the borough’s case for rectification was “overwhelming” is not too surprising given the classic rectification scenario: the parties’ negotiations had resulted in agreement on certain terms set out in the final iteration of a tender document but inadvertently, an earlier draft of the document was included in the executed contract paperwork.

The judge’s analysis of Viridor’s battery of arguments nevertheless comprises a useful summary of the law on rectification.

The judge criticised the sloppy work of the borough’s solicitors and management consultants when putting the contract documents together, commenting that perhaps the complexity of modern day public services contracts had discouraged proper checking. This judgment is a salutary reminder of the importance of undertaking a thorough check of all contract documents prior to execution.

Ted Lowery is a partner in Fenwick Elliott