Rectification is an equitable remedy available to correct a contract document that fails to accurately record the parties' true agreement. As stated in Heintzman and Goldsmith on Canadian Building Contracts, rectification at first glance seems like a useful remedy to correct building contracts, since there are any number of aspects regarding the scope, dimension and details in a building contract about which the parties could be mistaken, and particularly given the fact that due to the pyramidal structure of the construction industry, the possibility of mistake increases the further one goes down the pyramid.
The recent Ontario Court of Appeal decision in 2484234 Ontario Inc. v. Hanley Park Developments Inc. is noteworthy because it demonstrates that even though strict conditions must be met before rectification can be granted, the court will not tolerate unconscionable behavior by a contracting party.
The court applied the well-known test in Canada (Attorney General) v. Fairmont Hotels Inc., 2016 SCC 56. The error in the document sought to be rectified can result from a common mistake or a unilateral mistake. In case of a common mistake, rectification of an agreement is available upon the court being satisfied that:
1. The parties had reached a prior agreement whose terms are definite and ascertainable;
2. The agreement was still effective when the instrument was executed;
3. The instrument fails to record accurately that prior agreement; and
4. If rectified as proposed, the instrument would carry out the agreement.
In the case of a unilateral mistake, in addition to the four requirements set out above, the court must also be satisfied that:
5. The party resisting rectification knew or ought to have known about the mistake; and
6. Permitting that party to take advantage of the mistake would amount to 'fraud or the equivalent of fraud'.
The case before the Court of Appeal concerned a claim for rectification of a transfer agreement granting an easement over four parts of a property. The purpose of the easement was to construct an access road to a subdivision to be developed by the appellant. When the developer discovered that a fifth part of the property was also required for the access road, it sought rectification of the agreement to include a fifth part.
The application judge dismissed the application for rectification on the basis that the developer had failed to meet steps 3 and 6 of the Fairmont test. With respect to step 3, she held that the Transfer Agreement accurately recorded the prior agreement because "Part 5 was never discussed nor made the subject matter of a prior agreement”. With respect to step 6, she held that permitting the respondent to take advantage of the appellant's mistake did not amount to fraud or its equivalent in this case because there was no clause requiring the respondent to convey "all lands necessary for the development of the access road", the respondent did not intentionally deceive the appellant, and the appellant should have verified the boundaries pursuant to the due diligence condition.
The appellant developer argued that the parties' correspondence made it clear that the developer was seeking a transfer of and easement over the parts of the adjacent property that would allow development of the access road and that the respondent communicated that it was agreeable to doing so, even while it was specifying one less part of its property than it knew would be sufficient.
The respondent did not dispute that it knew that Parts 1 to 4 were insufficient for the construction of the access road but argued that it simply never agreed to transfer Part 5 and that rectification was therefore unavailable. The appellant should have verified what it needed and could not now complain if it signed an agreement that did not achieve its goals.
The prior agreement with definite and ascertainable terms
The respondent’s lawyer had sent a letter to the developer referring to "parcel of land outlined as Parts 1, 2, 3 and 4" and stating that "Engineer for the project has advised my client that these 4 parts will be sufficient for the road which is to be built to access the subdivision". This letter set out terms and called for their acceptance. The Court of Appeal held that this was sufficiently definite and ascertainable prior agreement to satisfy the Fairmont test.
Therefore, the respondent had promised to convey Parts 1 to 4 on the basis that they were sufficient for access, and the respondent acknowledged that the purpose of the agreement was to facilitate the development of the proposed subdivision.
That language was enough to distinguish the case from that in Fairmont:
58 Two important consequences flow from a consideration of this language.
59 First, these terms of the antecedent agreement make this case quite different from Fairmont. That the lands conveyed would be sufficient to build the Access Road and would facilitate development was not simply an "aspiration", an "unspecified plan", an "intended effect", or an "inchoate or otherwise undeveloped "intent"", as was tax neutrality in Fairmont. That the lands would be sufficient for the Access Road and thus facilitate development is addressed in the terms of the antecedent agreement itself.
60 Second, the application judge's statement that there was no representation or warranty by the respondent as to what was required for the Access Road was made without adverting to these terms, let alone giving them meaning.
[…]
65 The March 7 letter was in 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 requiring the Janlyn Crescent connection. That was the genesis and aim of the transaction. These objective facts underscore the importance of the lands being described in the antecedent agreement as "sufficient" and an easement over them as facilitating development. In light of the factual matrix, these words cannot be viewed as surplus. An interpretation that allows the contract to function in furtherance of its commercial purpose is preferred over one that does not.
While the application judge found that Part 5 had never been expressly discussed, the Court of Appeal held that even if that were so, that did not determine the matter.
Since the respondent promised to convey Parts 1 to 4 on the basis that they were sufficient, it was obligated to do what was necessary to make them sufficient and which was in its power to do, and that was to include Part 5. With Part 5, the agreement made business sense; without it, did not. It was clear to the court that had the parties been asked by an officious bystander about whether Part 5 would be included if the Parts specified as sufficient were not in fact sufficient, they would have answered: "obviously". The inclusion of Part 5 was therefore an implied term of the parties' true agreement.
It followed that the transfer agreement did not accurately record the parties' prior agreement because it did not fully record it.
Unconscionability
With respect to step 6 of the Fairmont test (permitting that party to take advantage of the mistake would amount to 'fraud or the equivalent of fraud), the application’s judge finding that the respondent did not intentionally deceive the appellant was held not to have averted to the proper test. The Court of Appeal held that deceit or fraud in the strict legal sense was unnecessary; and that any conduct that would make it unconscientious for a person to avail himself of the advantage obtained, including all kinds of unfair dealing and unconscionable conduct", were sufficient. In this case, the respondent’s principal testified that he was aware that parts 1 to 4 were insufficient if part 5 was not included but was also aware that the formal agreement only referred to parts 1 to 4. This conduct was designed to lead, or knowingly allow, the appellant to think it was getting what it needed and therefore satisfied step 6 of the rectification test.
In those circumstances, the Court of Appeal rectified the transfer agreement to include Part 5 and ordered specific performance of the rectified agreement. The case serves as both a demonstration of the power of this remedy and a timely reminder that very strict conditions must be met before the remedy becomes available. On the facts of that case, rectification was granted because the parties’ true agreement was readily definable and ascertainable and one party had acted unconscionably to take advantage of the other’s mistake. The mistake was one of detail, the Court preferred an interpretation that gave effect to the commercial purpose of the transaction over one that did not. Nevertheless, the decision affirms the limits of this equitable remedy. Rectification can correct a document to accord with both parties’ true agreement, it cannot change an agreement to make it achieve one party’s desired result.