Legal Briefing

Rectification possible despite entire agreement clause

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Corporate and commercial | 01 September 2010

Freedom of contract is a cornerstone of English contract law. It prevents parties that have struck bad or downright foolish bargains from obtaining judicial assistance when seeking to extricate themselves from their contracts. While courts are understandably loathe to intervene in poorly negotiated contracts, they do have the power to assist in cases of genuine mistake and to give effect to the intentions of the contracting parties. In the recent case of Surgicraft Ltd v Paradigm Biodevices Inc [2010], the High Court explored the issues surrounding rectification of mistakes and the relevance of entire agreement clauses in such circumstances.

Legal Principles Relating to Rectification

  • The equitable remedy of rectification may only be applied to written agreements.
  • A mistake may be classified as either ‘common’ or ‘unilateral’ depending on whether it is an error or mistaken belief shared by both parties, or only one.
  • The law regarding rectification of a common mistake was examined by the House of Lords in Chartbrook Ltd v Persimmon Homes Ltd & ors [2009]. In this judgment, Lord Hoffmann identified the requirements that would enable a court to rectify a mistake in a contract as follows:
  • the parties to the contract must have a common continuing intention whether or not amounting to an agreement, in respect of a particular matter in the contract;
  • whether a common continuing intention exists is to be assessed by the court, on an objective basis;
  • there must be an outward expression of accord;
  • the common intention must have continued at the time of the execution of the contract; and
  • by mistake, the contract does not reflect the common intention.
  • The burden of proof is placed on the party seeking rectification and is of a high standard. Both the mistake and common continuing intention must be shown by ‘convincing proof’ or ‘with a high degree of conviction’ (Joscelyn v Nissen [1970] and The Olympic Pride [1980]).

Facts of Surgicraft

Surgicraft, an English manufacturer and distributor of medical products, appointed Paradigm as its North American distributor of a new type of spinal implant, by a written agreement dated 27 October 2004 (the agreement). Negotiations of the agreement were spread out over two months, in the form of discussions and travelling drafts. During the course of these negotiations, it emerged that Surgicraft intended to use the North American sales as a springboard to sell the company. Paradigm, concerned that a new owner would terminate its distribution agreement, requested a clause awarding it compensation in such an instance. It was agreed that any payment would be linked to Paradigm achieving designated sales targets before the acquisition.

After multiple drafts, telephone calls and meetings, the parties concluded the agreement less than an hour before Paradigm launched Surgicraft’s product at a trade conference. However, in error, the agreement signed did not record that Paradigm would receive sales-linked compensation in the event of a change of control at Surgicraft. It did, however, contain the following two clauses:

‘Clause 18: This Agreement constitutes the entire understanding between the parties with respect to the subject matter of this Agreement and supersedes all prior agreements, negotiations and discussions between the parties relating to it…

Clause 26.1: The signing of this Agreement implies acceptance of all clauses stated herein.’

In March 2005 a ‘clean’ version of the agreement was produced and re-signed by both parties. While some agreed variations to the contract were added, the document was largely the same as that executed previously and the mistake was not recognised.

On valid termination of the agreement, Surgicraft sought a declaration from the court that no compensation was due to Paradigm as a result. Paradigm argued that, although on the face of it, the agreement did not provide for compensation, the agreement did not represent what the parties had negotiated, and as such, sought its rectification. Surgicraft claimed that clauses 18 and 26.1 either created a contractual estoppel to any rectification or prevented a claim for rectification, or showed the parties’ intention to be bound by the contract as drafted, regardless of prior or other intentions.

Decision and Reasoning

Deputy judge, Christopher Pymont QC rejected Surgicraft’s submissions, saying that clause 18 did not prevent a claim for rectification. He explained that the purpose of an entire agreement clause was to prevent claims from arising from dealings outside the contract. He saw a claim for rectification as an entirely different matter to an entire agreement clause as the claim simply alluded to a mistake made by both parties in expressing their intentions that ‘infected’ the entire agreement, including any entire agreement clause.

The judge referred to the case of JJ Huber Ltd v The Private DIY Company Ltd [1995] in which Justice Roger Cooke held that a claim for rectification of a unilateral mistake was not precluded by the presence of an entire agreement clause – ‘a term that says “all the terms are in the document” (which is, essentially what an entire agreement clause does) cannot be read as meaning “all the terms are in the document when it is in the wrong form”.’ The judge, agreeing with Cooke J’s reasoning, extended the scope of the earlier judgment to common, as well as unilateral, mistakes. Surgicraft’s argument that Clauses 18 and 26.1 prevented Paradigm’s claim for rectification was therefore fully rejected.

The judge concluded by suggesting that despite its failure to preclude rectification in Surgicraft, the presence of an entire agreement clause is not entirely irrelevant in the case of mistake and rectification. If it can be shown that the entire agreement clause was considered by the parties as part of the negotiations, the prior negotiations may be given less weight. In Surgicraft the judge gave considerably more weight to Paradigm’s witnesses, finding Surgicraft’s witnesses ‘deliberately evasive’ and ‘not convincing’. He found no evidence that the entire agreement clause had been considered as part of the prior negotiations.

Conclusion

Surgicraft highlights the importance of carefully drafted contractual documents. Parties to a contract must be sure to check they accurately record all points agreed during negotiations.

A high burden of proof is imposed on the party seeking rectification in the case of a mistake, to prove that the written contract has failed accurately to record the parties’ agreement. Contemporaneous evidence is invaluable in showing these intentions, and it is therefore advisable that documents created and received at the pre-contract negotiation stage are retained. Witness evidence is also vital in this respect.