Contract rectification is the last resort

The Technology and Construction Court (TCC) judgment in The Council of the Borough of Milton Keynes v Viridor is a salutary lesson in getting your contract right at the outset to avoid lengthy and expensive contract rectification proceedings.

The case

The council entered into a 15-year contract with Viridor on 1 October 2009 for waste recycling services, which included a payment mechanism known as the Income Generating Payment Mechanism.

However, an incomplete draft of the payment mechanism, containing gaps in the formula and making no reference to indexation (which had formed part of Viridor’s initial bid) was included in the final form of contract. This arose as the council’s consultants had sent an earlier version of the payment mechanism to the council’s solicitor who had not checked it prior to incorporation into the execution version of the contract.

The council sought rectification of the contract to replace the earlier payment mechanism with the later, fully completed, version (submitted with Viridor's final tender).

Viridor accepted that the incomplete formula rendered the payment mechanism inoperable, but argued that the council was not entitled to rectification of the contract.

An expensive mistake

With both parties unable to reach agreement, the court was asked to consider a myriad of arguments and decide whether the contract should be rectified as a result of common mistake or unilateral mistake.

Common Mistake

The court endorsed the test required to demonstrate a common mistake of the parties as set out in the case of Swainland Builders Ltd v Freehold Properties Ltd [2002] EWCA Civ 560:

1. The council and Viridor must have a common continuing intention, whether or not amounting to an agreement, in relation to the payment mechanism.
2. There had to be an outward expression of 'accord' (i.e. agreement as to what was intended) between the parties.
3. The intention continued at the time of the execution of the contract.
4. As a result of the mistake, the contract did not reflect the parties’ common intention.

Mr Justice Coulson concluded that there was a common intention between the parties that the completed payment mechanism, including that indexation for inflation would form part of the contract. There was also an unequivocal outward expression of this accord as it had formed part of Viridor's tender, which the council had accepted.

Viridor’s argument that the intention was not continuing when the contract was executed was dismissed by the court as “hopeless" as there was no evidence whatsoever of any renegotiation of the matter.

The court found that the error had only been noticed after the contract had been entered into and, when spotted, Viridor’s principal negotiator was “immediately aware that the wrong document had been included in the contract”.

On the facts, the court had no hesitation deciding that both the council and Viridor had made a mistake in signing off the incomplete contract.

Unilateral mistake

The court also considered the council’s alternative argument of unilateral mistake (i.e. a mistake that the council made but which Viridor did not).

The ingredients for unilateral mistake are set out in the case of Thomas Bates & Son Limited v Wyndham's (Lingerie) Limited [1981] 1 WLR 505 and can be summarised as follows:

1. Party A must erroneously believe either that the document to be rectified contained a particular term, which it did not contain, or that the document to be rectified did not contain a particular term, which it did contain.
2. Party B was aware of the omission or inclusion of the term due to A's mistake.
3. Party B did not draw the mistake to the notice of party A.
4. That the mistake must be one calculated to benefit party B.

Unilateral mistake can only arise where one party is aware of the mistake of the other and fails to draw it to their attention. The court found that Viridor raised the mistake internally after the contract was executed. If the mistake had been raised pre-contract, the court would have found the ingredients for unilateral mistake – the straightforward conclusion would be that Viridor failed to draw it to the attention of the council because it considered "that it could gain a financial advantage by avoiding the tender offer".

It would therefore have been inequitable to allow Viridor to resist rectification.

On reflection…

The court observed that the insertion of the wrong schedule in the final contract, which arose due to the “sloppy work” of the council’s consultants and the lack of attention given to the final documentation by the council's solicitors, was “the alleged mistake at the heart of this case”.

The court added that the error was “perhaps a sad reflection of the fact that modern day contracts of this kind are so complicated that nobody (not even the consultants) bother to check the actual documentation being signed”.

The result was an expensive mistake for both parties which resulted in years of uncertainty, costly litigation and inevitably damage to the parties’ working relationship. Parties should consider rectification as the last resort.

Clearly the most effective way for the contracting parties to give effect to their agreement is to ensure that the contract documentation is correct in the first instance. To avoid uncertainty parties should:

1. ensure that the conditions of the contract and the technical schedules are consistent
2. thoroughly check the final version of the contract documents to ensure they reflect the most up to date version – spending a bit more time at this stage could save significant time later trying to unpick incorrect schedules
3. fill in all the blanks – do not leave things to chance.

Parties can help themselves by spending a bit more time finalising the contract documentation. Too often there is a rush to the finish and the final task of collating the technical schedules is not given the required importance. The lesson from the above case is that getting things wrong can lead to considerable uncertainty and expense.

This article was written by Ruth Chang.