Canada: Some Mistakes Are Correctible: Another Look At Contract Rectification

Last Updated: March 28 2014
Article by James J. Shanks

Most Read Contributor in Canada, October 2018

It goes without saying that parties should never enter into contractual relations loosely, assuming that mistakes can easily be corrected after-the-fact. Nevertheless, from time to time, documentary mistakes do occur, and depending on the nature of the mistake, courts can sometimes be called on to correct the error. The recent Ontario Court of Appeal decision in McLean v. McLean1 helpfully clarifies the law of contract rectification in a number of ways. At the same time, it also serves as a caution to aggrieved parties that such fixes are likely to be uncertain, expensive and time-consuming.

Facts of the case

The facts of the case are straightforward. In 1989, a farming couple decided to sell their farm to their son and daughter-in-law.  The sellers claimed that the sale was to occur at fair market value, with the purchase price fully secured by a 100% VTB mortgage. Unfortunately, both the transfer deed and mortgage failed to include, as part of the overall consideration, the value of the principal residence situate on the property, and thus included only the value of the barn, some out buildings and the surrounding lands. 

It appears that the legal documents were prepared, in part, based on tax and accounting information that had been produced in order to calculate the sellers' gain (and therefore taxes) payable on the sale. Naturally, that information excluded any gain and taxes on the principal residence. Lamentably, the tax and accounting information (i.e., excluding the value of the principal residence) was carried forward into the transfer deed and mortgage, thereby understating the purchase price and mortgage by $115,000 as a result. Many years later, when the mistake was discovered, the daughter-in-law denied the intended fair market value and disputed the sellers' attempts after-the-fact to increase the amount of the mortgage.

Analysis of decision & appeal

While the trial judge found that the contract documentation was inaccurately written up, and was thus a potential candidate for rectification, he also found that it was not the daughter-in-law's "subjective" intention to buy the farm at fair market value. Accordingly, he ruled that there was no "common intention" between the parties as to the true value at which the sale of the property was to occur. One party intended a sale at fair market value, while the other intended some lesser value. In accordance with settled law, he ruled that contract rectification could not therefore be imposed, as the remedy of rectification was only available where the parties had formed a "common intention" which the courts could easily substitute into an improperly prepared contract. Furthermore, the trial judge also held that the sellers had failed to establish their case with "convincing proof", seemingly applying a higher standard of proof upon the sellers than prevailed in other civil actions. In the result, the trial judge ordered that the transfer deed and mortgage should remain as they had been executed.

Happily for the sellers, the Court of Appeal overturned the trial judge's decision. In a much-needed clarification, the appellate court quickly dealt with the standard of proof required in rectification cases. Shortly put, the standard of proof is exactly the same as in any other civil action, namely proof "beyond on a balance of probabilities." No higher or special level of proof, such as "convincing proof", is required.  

More importantly, the Court of Appeal held that, in attempting to ascertain whether a common intention exists between the parties, a trial court must not necessarily seek to discern the parties' actual or subjective intent. Rather, and based upon the totality of all contemporaneous acts and documents, adjudged at or near the time of contract, the court must determine instead whether the parties were in "objective" agreement as to the particular item or term of their contract that is subsequently impugned as having been erroneously recorded. In short, rectification cases always require a finding of a common intention, objectively determined, based on all the relevant evidence at the time of contract. In the McLean case, it was clear not only based on the tax and accounting information that had been prepared, but also from other evidence, that both the sellers and the purchasers shared a common intention that the farm sale was to occur at fair market value, notwithstanding later assertions by the daughter-in-law as to her true subjective intent at the time.

It is important that the reader note that the McLean case is not a case of "mistake" in the "formation" of the contract. Rather, it is a case where the contract document, as prepared, failed to capture the clear intention of the parties. Cases of the former involve a misalignment of intent, a clear lack of common intent. Had the court determined here that the parties were mutually mistaken in the formation of their contract, i.e., that each party misunderstood each other and were at cross purposes, then common intent would not have existed, and the remedy of rectification would not have been available.  In such cases, a different area of law dealing with mutual, or even unilateral, mistake comes into play, involving other considerations, including equitable considerations, as well as other remedies. 

Having found common intent as to the value at which the farm sale was to have occurred, the Court of Appeal ordered that the contract between the parties be rectified. Furthermore, the Court ordered the local land registrar to amend the parcel register for the subject lands to increase the amount of the transfer and the mortgage on the public records. Interestingly, the court noted that the increased transfer amount likely required the purchaser to top-up land transfer tax previously paid, and helpfully the court pointed out that the increased mortgage amount was subject to the rights of holders of intervening mortgages who had given value in the interim without notice of the dispute.

In summation, the McLean case helpfully clarifies the gauntlet parties must run in seeking contract rectification.  At the same time, it reinforces the care and caution that contracting parties (and their counsel) must employ in properly settling and documenting their contractual arrangements.  

 Footnote

1 118 O.R. (3d) 216 (2014)

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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