Australia: What a waste: strategies to avoid mistakes in contracts and expensive rectification

Good version control, proper reviewing, and clear lines of responsibility will help ensure you sign the contract you've actually negotiated.

When you're involved in a procurement, there's often pressure to get a final document "on the table", ready for execution - and that's when oversights commonly happen. It might be overstating the case to say, as one English judge recently did, that "modern day contracts of this kind are so complicated that nobody (not even the consultants) bothers to check the actual documentation being signed", but there are strategies that those involved in contract preparation can use to reduce the chances of document-related error.

Before we look at them, though, we'll see how errors can arise, and what fixes are available, using as a case study one which that English judge recently decided, The Council of the Borough of Milton Keynes v Viridor (Community Recycling MK) Limited [2017] EWHC 239.

The wonderful chain of events giving rise to the application

The Milton Keynes Council entered into a 15 year contract for waste recycling services, which included a payment mechanism, known as the Income Generating Payment Mechanism (IGPM).

Unfortunately, the final version of the contract which was executed did not contain the version of the payment mechanism agreed by the parties.

The error was the result of what was described by the Court as "sloppy work" by the Council's business adviser, and to a lesser extent, its solicitor, who together were responsible for contract preparation. It appears that the solicitor requested the final draft of the IGPM from the business adviser, who confirmed that the document provided was, indeed, the final draft. In fact, the document supplied was an earlier version of the IGPM with drafting instructions still in place. The final draft, on the other hand, included figures and narrative identifying when indexation should be applied.

Once the parties discovered this, Viridor developed a work-around, proceeding as if the fees in the final draft of the IGPM had, as intended, been incorporated in the Contract.

What was not apparent to the Council was that Viridor's work-around differed in one crucial respect from the final draft of the IGPM: it did not provide for indexation of the fixed fee payable by Viridor to the Council. The Council's obliviousness to this point was clear from its conduct; in December 2010, the Council withdrew an invoice to Viridor which included an adjustment for inflation, reissuing this without the relevant adjustment.

Once it finally discovered the indexation had not been applied, the Council sought to resolve the issue with Viridor informally, but this was not successful, so the Council sought rectification, seven years into the contract.

Requirements for rectification

Pectification is an equitable remedy of last resort which allows a court to wield a metaphorical red pen and alter the terms of a contract so that it reflects the "true intention" of the parties at the time that they entered into it. The court's power extends to the award damages for breach once rectified.

Australian and English law is substantially similar when it comes to rectification on the basis of mistake. In the case of common mistake, the Council was required to demonstrate that:

  • the parties (Council and Viridor) had a common continuing intention, whether or not amounting to an agreement, in respect of a particular matter in the document (in this case, the IGPM schedule in the Contract), to be rectified;
  • there was an outward expression of "accord" (agreement as to what was intended) between the parties;
  • the intention continued at the time of execution of the contract; and
  • by mistake the contract did not reflect that common intention.

By contrast, rectification on the basis of unilateral mistake required the Council to demonstrate that:

  • the Council erroneously believed that the IGPM included in the contract was the final draft;
  • Viridor was aware of that it was not the final draft and that it was due to a mistake on the part of the Council;
  • Viridor omitted to draw the mistake to the notice of the Council; and
  • the mistake was one benefitting Viridor.

The Court finds common mistake

In the Milton Keynes Case, although Viridor presented a range of arguments as to why the Court should not agree to rectification, the Council was successful on the basis of common mistake.

The Hon Mr Justice Coulson, presiding over the application hearing, concluded with respect to common mistake that:

  • both Council and Viridor made a mistake in executing a version of the Contract that included the incomplete IGPM rather than the completed version;
  • there had been a common intention to include the completed final draft of the IGPM in the Contract; and
  • neither party had identified the insertion of the wrong document prior to execution.

Given the significance of the gaps in the IGPM to the operation of the Contract, he said, "if anyone on either side had spotted them before signing, they would not have stayed silent". Contemporaneous documentation provided to the Court also supported identification post-execution.

Mr Justice Coulson went on to consider the issue of unilateral mistake, noting that this was only relevant if the error had been identified by Viridor before (rather than after)execution. If that had been the case and the court was wrong in finding otherwise, the ingredients for unilateral mistake would, in Mr Justice Coulson's view, have been made out.

Strategies to reduce the risk of error

Many years after executing the contract, the Council and Viridor have ended up in the place they both originally agreed upon, but only after many thousands of pounds in legal costs.

So what could have been done by Milton Keynes Council or Viridor to ensure that they executed the contract they intended to?

Some useful strategies include:

  • maintaining version control of documents during contract preparation ? that is, being able to identify which draft is the current draft. A spreadsheet, setting out each draft prepared, when that draft was sent out and to whom, can assist with this;
  • clearly identifying which party is responsible for preparation of the "master" document into which changes will be tracked. This reduces the risk of confusion over competing versions of the same document and the risk of sideline fights over control;
  • having a single point of contact for receipt and sending of contract-related documentation;
  • undertaking a thorough read-through of the penultimate version of the contract on which the execution version will be based;
  • tasking a staff member who has not been closely involved in contract preparation to conduct a "clean eyes" review of the penultimate version to identify any errors that may have been overlooked by those closer to it;
  • checking the execution version of contracts prior to signature to ensure that:
    • they reflect the agreement of the parties; and
    • they are complete and that all pages, schedules and attachments are accounted for; and
  • asking questions and seeking confirmation if something looks ambiguous, unusual or incomplete.

Dealing with errors discovered post-execution

If an error is identified post-execution, then you should first discuss it with your legal adviser before you notify the other party.

If the other party agrees that the error needs to be addressed, you can achieve this through execution of a deed of variation, using the process for variation set out in the contract.

While disagreement between the parties as to whether there is, in fact, an error or as to how an error should be addressed, may initially be addressed by the parties informally, communications between the parties should be in writing. If initial attempts to achieve resolution have not succeeded, then it may be appropriate to invoke the dispute resolution process set out under the contract.

If the contractually-prescribed dispute resolution process fails to achieve an outcome, then an application to the court for rectification may, as in the Milton Keynes Case, be appropriate. An application for rectification is, however, like any other court process: time-consuming, expensive and inherently risky. Getting it right first time through a consistent approach to version control, careful checking and confirmation should, therefore, always trump the exigencies of execution.

Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.

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