Read before you leap!

The findings of the English Court of Appeal in the case of Hurst Stores and Interiors Limited v ML Europe Property Limited (Hurst Stores Case) deals with the question of whether a contract can be set right (rectified) where there is a unilateral mistake (i.e a mistake made by one party to the contract).

Apart from an interesting set of facts, this case is of value to would be contractors as an example of:

1. what not to do in contract negotiation to avoid a mistaken party being able to seek orders from the court to have a contract rectified; and
2. the elements that would need to be satisfied by the mistaken party in order to establish an entitlement for the contract to be rectified.

It is important to note that it is not in every case that a mistake by one party to a contract would give rise to a remedy in rectification. As this case makes clear, the courts will only make orders to rectify a contract in circumstances where it is established by the mistaken party that:

1. the unmistaken party had knowledge of the mistake; and
2. the unmistaken party had conducted themselves unconscionably in not drawing the mistake to the attention of the mistaken party.

This is a high standard of proof and reflects the position taken by Australian courts to the question of rectification for unilateral mistake.

An example of the position taken by Australian courts to rectification for unilateral mistake is Leibler v Air New Zealand Limited. In this case, the courts were prepared to expand the application of the remedy of rectification where there was a unilateral mistake in the contract, but only where it could be established that the unmistaken party had knowledge of the mistake and had conducted themselves unconscionably in not drawing the mistake to the mistaken party’s attention.

Australian courts have only recently been willing to consider making orders to rectify a contract where a unilateral mistake has been established. In Australia, the remedy of rectification had traditionally been limited to situations where both parties made the same mistake regarding the contract. It is therefore reasonable to assume that Australian courts, particularly in relation to commercial contracts, will be reluctant to make orders to rectify a contract unless there is irrefutable evidence of the unconscionable conduct of the unmistaken party.

On this basis, the Hurst Stores case serves as a valuable reminder to contractors, especially parties to a commercial contract, to ensure that the written document that is entered into reflects their understanding of the arrangement they have negotiated.

Briefly, the facts of the Hurst Stores Case were as follows.

ML Europe Property Limited (MLEP), an entity controlled by Merrill Lynch, employed Hurst Stores and Interiors Limited (Hurst) to fit out the toilet blocks at the London headquarters of Merrill Lynch. 

MLEP set up Mace Limited (Mace) to coordinate and administer the trade contracts, including the relationship with Hurst. MLEP and Mace entered into a trade contract with Hurst in October 2000.

The trade contract stipulated a fixed price for the work Hurst was to do. The fixed price could be adjusted having regard to variations requested by MLEP and extensions of time granted under the trade contract.

MLEP was required to request variations in a formal contract instruction (CMI). Hurst was required to submit an interim monthly statement of account (ISA) valuing the work performed so far. The trade contract provided for the issue of a final statement of account by Hurst once the works were completed.

In April 2001, Mace prepared an amended statement (April 2001 Statement) worded as though it had been prepared by Hurst’s project manager. The statement was entitled ‘draft final account’ and included the words:

“In consideration of the agreement that final payment is to be made by the client, we hereby agree that payment to us of the final payment will be accepted by us in full and final settlement of all our claims (other than claims in respect of value added tax) arising out of or in connection with the trade contract works which have accrued up to and including the date of this statement.” 

Hurst’s project manager, under the impression that the April 2001 Statement was no different from other ISA’s he had signed, did not read it carefully before signing it. He did not realise that this additional wording had been inserted. Hurst’s project manager did not at any stage think that the April 2001 Statement was a final statement of account.

When the work was completed in October 2001, Hurst, in accordance with the trade contract, submitted a final statement of account to MLEP and Mace which included claims for ‘additional preliminaries’ and costs incurred by Hurst as a result of delays caused by MLEP.

MLEP, refused to accept Hurst’s final statement, arguing that the April 2001 Statement represented Hurst’s full payment entitlements.

A dispute subsequently arose between the parties and Hurst sought a declaration from the court that the April 2001 Statement was not binding on Hurst on the basis that:

1. there was a unilateral mistake by Hurst’s project manager;
2. Hurst’s project manager did not have authority to make a binding promise in terms of that document;
3. the document was not supported by consideration; and
4. MLEP and Mase were estopped (i.e prevented) from contending that the document was binding because they had never previously made that contention.
 
Findings
At first instance, the court held that:

1. it was clear that Hurst’s project manager was not aware of the intention of the April 2001 Statement and had not read it properly before he signed it;
2. Hurst’s project manager did not understand, and Mace’s representative did not explain, the effect of the April 2001 Statement. Hurst’s project manager did not appreciate that Mace was inviting Hurst (by including the statements regarding final payment) to forgo any and all as yet unrecognised contractual claims for additional costs that it might have;
3. Hurst’s project manager did not have the authority to bind Hurst in relation to a previously uncontemplated type of final accounting document which involved a variation of the trade contract between Hurst, Mace and MLEP; and
4. the unmistaken party either knew this or at least closed his eyes to the possibility that the project manager was unaware.

The court was of the view that an unmistaken party’s conduct would be considered unconscionable where a party intends the other party to be mistaken as to the construction of the agreement and so conducts himself to prevent the other party from discovering the mistake.

In this case, the court held, having regard to the above factors, that the conduct of Mace and MLEP was unconscionable and ordered that the April 2001 Statement should be rectified to remove all references to final statement in it.

Appeal
MLEP subsequently appealed, arguing that the court had not given any, or any appropriate weight to the use of words ‘draft final account’ by Hurst’s project manager on the top of the April 2001 Statement and that the description of the document as a “draft final account” would be expected to include all financial entitlements.  The appeal was dismissed.

Lessons to be learned
This was a lucky escape for Hurst. Given the potential difficulty of establishing an entitlement to have a contract rectified for unilateral mistake, it is worthwhile taking the following steps to minimise the risk that a unilateral mistake will be made:

1. Implementing internal procedures that ensure contracts are reviewed by a second person before being signed.
2. Clearly identifying who is authorised to enter into contracts on behalf of your company or business.
3. Ensuring that the terms of a contract accurately reflect the position of the parties and their understanding of the arrangement at the time that the document is entered into.
4. If all else fails!! Ensuring a culture exists that means the documents are read before being signed.

Authors:  Jacqueline Barrett & Mark Allen of Bartier Perry Lawyers – 02 8281-7828