Can Courts Correct Contracts?

What happens if parties to a contract (or one party) realize that the contract entered into does not accurately reflect their true intentions? In certain circumstances, a court may amend the terms of a written contract using rectification. However, courts will only grant rectification in limited and clearly defined circumstances.

Common Mistakes vs Unilateral Mistakes

While written contracts are presumed to reflect the intentions of the parties who sign them, this may not always be the case. Rectification can arise in two situations; common mistakes or unilateral mistakes. The main difference between the two in the context of contract rectification lies in who is mistaken and whether there was misconduct.

Common Mistake:

• A shared misunderstanding by both parties to a contract.

Unilateral Mistake:

• Only one party is mistaken and the other party knew or ought to have known of the mistake.

The leading case on rectification of contracts comes from the Supreme Court of Canada decision, Canada (Attorney General) v. Fairmont Hotels Inc.¹ Fairmont sets out the test for the rectification of both common mistakes and unilateral mistakes.

Rectification of Common Mistakes

In Fairmont, the Supreme Court of Canada held that, where the error of the contract results from a common mistake, rectification of an agreement is available upon the court being satisfied that;

1. The parties had reached a prior agreement whose terms are definite and ascertainable;
2. The agreement was still effective when the instrument was executed;
3. The instrument fails to record accurately that prior agreement; and
4. If rectified as proposed, the instrument would carry out the agreement.²

Rectification of Unilateral Mistakes

In the case where a unilateral mistake has occurred, Fairmont held in addition to the four requirements set out above, the Court must also be satisfied that;

5. The party resisting rectification knew or ought to have known about the mistake; and
6. Permitting that party to take advantage of the mistake would amount to 'fraud or the equivalent of fraud.'³

Rectification is Not a Catch-All Remedy

Rectification is limited to situations where the written contract does not reflect what one or both parties actually agreed to.⁴

While a court may rectify a contract which inaccurately records a party's agreement respecting what was to be done, it cannot be used to rewrite a contract to match what the parties wished the deal had been.⁵ Performance Industries Ltd. v. Sylvan Lake Golf & Tennis Club Ltd., referred to in Fairmont, further demonstrates that rectification requires proof of the exact terms the written document should contain in order to reflect the parties' original agreement.⁶ This ensures that rectification is only available where there is clear and convincing evidence of a prior agreement.⁷

How to Go About Rectifying a Contract

Where there is a mistake common to both parties, rectification is available upon the court being satisfied of the test laid out in Fairmont on a balance of probabilities.⁸ Parties should be prepared to provide evidence sufficiently strong to satisfy the court that the agreement does not reflect the intentions of the parties.⁹

For a unilateral mistake, the party seeking rectification must also show that the other party knew or ought to have known about the mistake and that permitting the defendant to take advantage of the incorrectly drafted agreement would amount to fraud or the equivalent of fraud.¹⁰

Takeaway

Rectification is a useful tool for addressing mistakes in written contracts and other legal instruments, ensuring they align with the true intentions of the parties. Provided the test set out in Fairmont is met, the courts can use rectification for either a common or unilateral mistake.

Footnotes

1. 2016 SCC 56 [Fairmont, SCC]

2. Ibid at para 14.

3. Ibid at para 15.

4. Ibid at para 3.

5. Ibid at para 3.

6. Ibid at para 13, citing Performance Industries Ltd. v. Sylvan Lake Golf & Tennis Club Ltd., 2002 SCC 19, [2002] 1 S.C.R. 678 at para 31.

7. Ibid at para 38.

8. Ibid at para 35, citing F.H. v. McDougall, 2008 SCC 53, [2008] 3 S.C.R. 41 at para 41.

9. Ibid at para 38.

10. Ibid.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.