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Jun 22, 2020

Why commercial realities matter in contractual rectification

By Marco P. Falco
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The Lawyer’s Daily View original

In 2016, the Supreme Court of Canada affirmed in Canada (AG) v. Fairmont Hotels 2016 sec 56, that contractual rectification is available to correct written contracts which inaccurately record the parties' bargain. 

Rectification is limited. It can only be used to amend the written instrument based on the agreement the parties have already reached and cannot be employed to undo the unanticipated effects of that agreement. 

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 agreement was reached. 

A missing part

In Hanley Park, the respondent agreed to sell property to the appellant for residential development. 

The respondent obtained conditional approval of a draft subdivision plan. One of the conditions was that there had to be an access road connecting the proposed subdivision to an existing road. Accordingly, a road had to be constructed across an adjacent property, 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 built. 

On March 7, 2017, the respondent advised the appellant that it was not prepared to sell the adjacent property. However, the respondent proposed that it instead transfer and grant an easement to the appellant over the adjacent property. The respondent observed that its engineer had recommended a conveyance of Parts 1, 2, 3 and 4 on a draft reference plan, which would "facilitate the development of the proposed subdivision ... ." 

Accordingly, the parties entered into a formal Transfer Agreement. 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 then granted the appellant a formal easement over Parts 1, 2, 3 and 4. 

By 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 Court of Appeal sided with the appellant. It held that the Transfer Agreement should be rectified to include Part 5 and that this rectified contract ought to be specifically performed.

Business efficacy and rectification

The court in Hanley Park observed that rectification is a limited, equitable remedy. Citing Fairmont, the court held that rectification is restricted 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." 

Rectification applies to common or unilateral mistakes in the contract. 

If the error is the result of a common mistake, 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, in addition to the considerations above, the court 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 noted 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 .... To read the antecedent agreement as only providing for a transfer of and easement over Parts 1 to 4 ... would result in commercial absurdity." 

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. 

Good business sense matters 

Many other considerations factored into the court's reasoning in Hanley Park.

What likely guided the equities, however, was the underlying notion that the exclusion of Part 5 made little commercial sense. It would hamper construction of the access road and the development of the project. This could not have been the parties' intention. 

Hanley Park's significance arguably lies in the principle that good business sense plays a key role not only in contractual interpretation, but in rectification. 

The decision serves as a reminder that, at its core, rectification is an equitable remedy - those equities depend on the commercial context in which the agreement was executed.

This article was originally published by The Lawyer’s Daily, part of LexisNexis Canada Inc.