This article is an excerpt from The Art of Tendering: A Global Due Diligence Guide, which is available for purchase.
The Supreme Court of Canada’s February 2002 decision in Performance Industry v. Sylvan Lake Golf and Tennis Club Ltd. illustrates the difficulties inherent in rectifying a material contract mistake. The case involved a land development dispute between Performance Industry and the Sylvan Lake Golf and Tennis Club. The Golf and Tennis Club had entered into discussions with Performance Industry and had verbally agreed to sell a 110-yard deep strip of land along its 18th fairway for the development of two rows of homes.
When the description of the land was reduced to writing, it specified 110 feet instead of 110 yards. Performance Industry did not notice this discrepancy when it signed the contract. After the error was discovered, the Golf and Tennis Club insisted on the written terms even though its negotiator knew at the time of signing that Performance Industry had overlooked the discrepancy.
Performance Industry sought a rectification of the contract so that it reflected the originally agreed upon verbal terms. While the Supreme Court recognized that the remedy of rectification is available for a unilateral mistake, it noted that a number of onerous preconditions must be met before it is granted:
Rectification is an equitable remedy whose purpose is to prevent a written document from being used as an engine of fraud or misconduct “equivalent to fraud”. The traditional rule was to permit rectification only for mutual mistake, but rectification is now available for unilateral mistake (as here), provided certain demanding preconditions are met.
The Supreme Court summarized those demanding preconditions as follows:
- An ascertainable oral contract existed.
- The parties failed to accurately reduce that contract to writing.
- The defendant knew or ought to have known of the error at the time of signing.
- The defendant’s attempt to rely on the written terms would amount to a fraud.
The Supreme Court acknowledged that rectification should be used sparingly and should not be seen as a substitute for due diligence. However, the Supreme Court rejected the defendant’s assertion that the plaintiff’s negligence in reviewing the documents should be a bar to rectification:
To the extent the appellants’ argument is that in such circumstances the Court may exercise its discretion to refuse the equitable remedy to such a plaintiff, I agree with them. To the extent they say the want of due diligence (or negligence) on the plaintiff’s part is an absolute bar, I think their proposition is inconsistent with principle and authority and should be rejected.
While Performance Industry was ultimately able to rectify the material mistake, that rectification required a lengthy, costly, and onerous process involving a protracted legal battle. As this case shows, preventing errors before they occur is much easier than rectifying them after the fact. Contracting parties should therefore take great care to accurately document the material terms of their deals.
