May 19, 2020
Business Realities Matter When Courts “Correct” Contracts
Canadian Courts have always had the power to correct mistakes in commercial contracts. The Supreme Court of Canada, in its 2016 decision Canada (AG) v. Fairmont Hotels, 2016 SCC 56, affirmed that the doctrine of rectification is available to amend contracts that inaccurately record the parties’ bargain.
Rectification, however, is a limited remedy. It may only be used to amend the written instrument based on the agreement the parties have already reached. It cannot be employed to undo the unanticipated effects of that contract, after it is concluded.
This then leads to the inevitable question: what considerations are at play when a Court decides whether or not to modify a written instrument?
A recent decision of the Ontario Court of Appeal, 2484234 Ontario Inc. v. Hanley Park Developments Inc., 2020 ONCA 273, brings into sharp relief one of the most overlooked factors involved in the rectification analysis—the business reality in which the terms of the agreement were reached.
You’re Missing A Part
The facts of Hanley Park were seemingly designed for the rectification remedy.
The respondent agreed to sell lands to the appellant in the City of Belleville for residential development.
The respondent obtained conditional approval of a draft subdivision plan for the construction of residential units on the lands. A condition of the approval of the draft subdivision plan was that there had to be an access road to connect the proposed subdivision to an existing road. To meet that condition, a road had to be constructed across an adjacent property, which was also owned by the respondent. The appellant asked the respondent if it would be willing to sell and then repurchase the adjacent property so that the access road could be constructed.
On March 7, 2017, the respondent advised the appellant that it was not prepared to sell the adjacent property. The respondent proposed, however, that it would instead transfer and grant an easement to the appellant over the adjacent property.
The respondent noted that its engineer had recommended a conveyance of Parts 1, 2, 3 and 4 on a draft reference plan. That conveyance would “facilitate the development of the proposed subdivision”.
Accordingly, the parties entered into a formal Transfer Agreement on the closing date, which related to the transfer and easement over part of the adjacent property. The Transfer Agreement referred to Parts 1, 2, 3 and 4 on an attached draft reference plan and defined these parts as “Property”. The respondent ultimately granted the appellant a formal easement over Parts 1, 2, 3 and 4 for the access road construction.
However, in mid-2018, the appellant discovered that Part 5 of the adjacent property was also needed to build the access road.
The appellant asked the respondent to effect a transfer to include Part 5. The respondent refused. Although the respondent did not dispute that Parts 1 to 4 were not sufficient for the construction of the access road, it stated that it had never agreed to the transfer of Part 5.
The appellant argued that it was always the parties’ intention that the appellant was seeking a transfer and easement over the parts of the adjacent property that would allow the construction of the access road. The respondent was always agreeable to this proposal, even if it failed to include Part 5 in the relevant documents and correspondence.
The Court of Appeal sided with the appellant. It held that the Transfer Agreement should be rectified to include Part 5. The Court further held that specific performance of the rectified contract was required.
The Role of Business Efficacy when Rectifying Contracts
The Court in Hanley Park echoed the theme from Fairmont that rectification is a limited, equitable remedy.
Citing Fairmont, the Court observed that rectification is confined to:
…cases where the agreement between the parties was not correctly recorded in the instrument that became the final expression of their agreement…It does not undo unanticipated effects of that agreement. While, therefore, a court may rectify an instrument which inaccurately records a party’s agreement respecting what was to be done, it may not change the agreement in order to salvage what a party hoped to achieve.
Rectification can therefore be used to correct common or unilateral mistakes in the contract.
If the error is the result of a common mistake between the parties, the Court will order rectification where:
- The parties reached a prior agreement whose terms are “definite and ascertainable”;
- The agreement was still effective when the instrument was executed;
- The instrument fails to record the prior agreement accurately; and
- If rectified as proposed, the instrument would carry out the agreement.
Where a unilateral mistake is made by one of the parties, the Court, in addition to the considerations above, must also be satisfied that:
- The party resisting rectification knew or ought to have known about the mistake; and
- Permitting that party to take advantage of the mistake would amount to “fraud or the equivalent of fraud”.
In considering the factors above and in reaching the conclusion that the Transfer Agreement included Part 5, the Court of Appeal considered that the exclusion of Part 5 from the transfer would result in a commercial absurdity:
The court should also seek to avoid an interpretation of a commercial contract that would result in commercial absurdity…commercial contracts are to be construed in accordance with sound commercial principles and good business sense…Reading the antecedent agreement as providing a contractual assurance by the respondent that the lands transferred are sufficient for the Access Road accords with objectively sound commercial principles, as it gives appropriate significance to the term of the agreement which referred to advice only the respondent had received, and that did not invite further enquiry by the appellant or require it to satisfy itself. To read the antecedent agreement as only providing for a transfer of and easement over Parts 1 to 4, even if they were known by the respondent to the be insufficient and incapable of facilitating development, would result in commercial absurdity.
Accordingly, after considering the objective facts known to the parties at the time, the Court concluded that the risk with respect to the sufficiency of Parts 1 to 4 for the construction of the access road was on the respondent.
The respondent’s March 7 letter was a response to “a direct request of the appellant for parts of the Adjacent Property that would allow it to meet the condition in the Draft Plan of subdivision”.
Properly interpreted, the Transfer Agreement had to be rectified to include Part 5.
The Importance of Good Business Sense
Many considerations factored into the Court’s reasoning in Hanley Park and the Court exercised considerable caution in deciding to amend the Transfer Agreement.
What likely guided the Court’s decision on the equities, however, was the underlying idea that the exclusion of Part 5 made little commercial sense. It would hamper construction of the access road and the development of the entire project. From an objective commercial perspective, this could not have been the parties’ intention.
In this way, Hanley Park’s importance lies in the principle that good business sense has a key role to play not only when Courts interpret contracts, but when they are asked to correct them.
The decision serves as a reminder that, at its core, rectification is an equitable remedy—and those equities depend on the commercial context in which the agreement was realized.