What is "Rectification" in Contract Law? 3: Mutual Mistake

Two days ago I did a post on the law of "rectification", a legal concept used "to correct a contract which has been mistakenly drawn so as to carry out the common intention of the parties and have the contract reflect their true agreement"; yesterday I addressed rectification in cases where the mistake lay only on one side.

Today's blog post will address what happens when both parties make a mistake.

The case

We continue our examination of the Ontario Court of Appeal's decision in Royal Bank of Canada v. El-Bris Limited, [2008] 92 O.R. (3d) 779 (C.A.). In that case the bank sought to collect on a guarantee: a businessman had given a personal guarantee for $700,000 in additional credit, and, as a part of that guarantee, had pledged a collateral mortgage. He repaid the debt, and sought a discharge of the mortgage (which was granted), but the bank pursued him for $700,000 under the guarantee. The businessman took the position that the guarantee had been for only $700,000, not $1,400,000, that the mortgage had been security for the guarantee, and with the repayment of the $700,000 the discharge of the mortgage his personal obligation was now terminated. The paperwork supported the bank's side that his guarantee was not limited to the $700,000; the businessman asserted that such a limitation was what was intended all along and sought rectification.

The trial judge agreed with the businessman, finding that the "parties intended the collateral mortgage to be security for Ellis's guarantee" and that paying off the collateral mortgage entitled him to a discharge of his obligation under the personal guarantee. The Court of Appeal dismissed the bank's appeal, agreed with the trial judge -- and thus also with this Mr. Ellis and not the rather more notorious one(s) -- agreed with the businessman.

The law

First and most importantly, the four-part test for unilateral mistake detailed yesterday does not apply to cases of mutual mistake. In such cases the test is less stringent, and has been laid down by the Court of Appeal in a previous case: Downtown King West Development Corp. v. Massey Ferguson Industries Ltd. 1996 CanLII 1232 (ON C.A.), (1996), 28 O.R. (3d) 327 at 336 (C.A.):

"the remedy of rectification is available only in certain defined circumstances and cannot be invoked to correct every mistake. In principle, rectification is permitted, not for the purpose of altering the terms of an agreement, but to correct a contract which has been mistakenly drawn so as to carry out the common intention of the parties and have the contract reflect their true agreement. The remedy is normally granted only where the mistake is mutual or common to the contracting parties."

In short, rectification exists to make the mistaken written contract reflect the real agreement of the parties; thus, to obtain rectification in a case of alleged mutual mistake becomes a question of fact and thus one for the presentation and examination of clear evidence. Does the evidence make it clear what the alleged real contract was?

When may the Court exercise its jurisdiction to grant rectification? In order for a party to succeed on a plea of rectification, he must satisfy the Court that the parties, all of them, were in complete agreement as to the terms of their contract but wrote them down incorrectly. It is not a question of the Court being asked to speculate about the parties’ intention, but rather to make an inquiry to determine whether the written agreement properly records the intention of the parties as clearly revealed in their prior agreement. The Court will not write a contract for businessmen or others but rather through the exercise of its jurisdiction to grant rectification in appropriate circumstances, it will reproduce their contract in harmony with the intention clearly manifested by them, and so defeat claims or defences which would otherwise unfairly succeed to the end that business may be fairly and ethically done... (fn1)

Tomorrow: the evidence required to obtain rectification.

(fn1) - H.F. Clarke Ltd. v. Thermidaire Corp. Ltd., [1973] 2 O.R. 57 at 64 - 65 (C.A.), reversed on other grounds 1974 CanLII 30 (S.C.C.), [1976] 1 S.C.R. 319.