Rectification of contracts: Correction facility

Some years ago, a contractor tendered for a local council contract to build a school on an 18-month programme.

The contractor was successful and signed the contract. It later discovered that the council had inserted a contract period of 30 months. The council would not budge, but the contractor was concerned about the extra time-related costs. It asked the High Court to “rectify” the contract to change the 30 months to 18 months which, it said, was what had been agreed. The court granted the application (Roberts vs Leicestershire County Council).

It was influenced by a feeling that the council’s officer must have known of the error in the document, and had probably taken advantage by keeping quiet.

Last month, Lord Toulson, one of the Supreme Court law lords, gave a talk organised by the Technology and Construction Bar Association. The title was “Does rectification need rectifying?” The talk highlighted some areas where the law needs to be made clearer.

Toulson himself was involved in a complex case in 2011 called Daventry District Council vs Daventry & District Housing Limited. An agreement was drawn up under which the council was to transfer its housing stock to a registered social landlord, DDH. The council’s housing staff were also to be transferred. The staff pension scheme was underfunded by some £2.4m.

A claimant must show that the parties had a ‘common continuing intention’ regarding some particular matter, and that, by mistake, the agreed document does not reflect that intention

The council and DDH had a series of negotiations about funding the deficit, during which numerous drafts of the agreement passed back and forth. When the council came to look at the final signed agreement, it was concerned to find that it was obliged to pay the £2.4m deficit. This, the council said, was not what the parties had intended. Not so, said DDH. So far as it was concerned, it was exactly what the parties had intended.

All three judges thought that the parties had originally come to an understanding that DDH would fund the deficit. Two of them, including Toulson,thought that DDH had then changed its mind without bringing that change of mind to the council’s attention.

The other judge thought that DDH had made apparent to the council that it had changed its mind over who was to make up the pension deficit. The two judges were the majority so the council won.

The case highlights the difficulty in doing justice in this sort of situation. Either the council would be forced to pay £2.4m for nothing, or DDH would be forced into an agreement that it did not think it had made.

In his talk, Toulson touched on some of the legal cases that show that rectification will not be given lightly. A claimant must show that the parties had a “common continuing intention” regarding some particular matter, and that, by mistake, the agreed document does not reflect that intention. The claimant must produce clear evidence of the alleged mistake, and that it was a mistake that was common to both parties (or, as in the Roberts case, that it was a one-sided mistake where the other side took advantage). As Toulson noted, the law is not clear as to the nature of the mistake that a claimant must show.

One interesting question is whether the remedy of rectification is still needed at all. Since the landmark contract case of Investors Compensation Scheme vs the West Bromwich Building Society in 1998 - with which most adjudicators and arbitrators will be familiar - the courts have had wide powers to interpret contracts in a non-literal and commercial way, and to correct errors of language and grammar in order to arrive at what the parties actually meant. Some say that rectification is now just a part of these wider powers relating to the interpretation of contracts.

Toulson’s view was that rectification, with all its problems, still has an important role. It is what is called an “equitable” remedy, which means that courts have a wide discretion whether to grant it. They might decline to do so where the claimant is otherwise to blame in some way, or where a third party has relied on the written agreement and would now be adversely affected if that agreement were changed.

Despite its importance as a remedy, rectification is not easy to obtain. Blunders by employers in drafting the scope of works or by contractors in inserting prices will not easily be excused. Rectification is still the exception, not the rule.

Ian Yule is a partner in Weightmans