In contract law, words used in a written instrument are powerful, but they are not invincible. One of the first major judgements of 2019 in New South Wales has reminded us all of one way to defeat even very clear wording of a contract.
This is the process called rectification, and it came up as part of a number of issues that the highest court in NSW had to consider. The case was Seymour Whyte Pty Ltd v Ostwald Bros Pty Ltd.
It has been said that rectification arguments are on the rise, as commercial contracts become more complex, records of contractual negotiation and correspondence are now electronic-based, and Ctrl+C and Ctrl+V have become prolific contract drafters.
Whether this is true or not, the case Seymour Whyte v Ostwald Bros and its lessons of rectification serve as a code red for everyone doing business with written contracts.
The NSW Roads and Maritime Services was the head contractor for a roads project. The parties to this dispute were a contractor Seymour Whyte Constructions Pty Ltd (Seymour Whyte) and its subcontractor Ostwald Bros Pty Ltd (Ostwald Bros).
The parties had either through neglect or confusion inserted in their written contract two deadlines for Seymour Whyte to issue a payment schedule:
- The box for Item 21 was ticked, which required payment within 30 days of a payment claim (which was to be made at the end of the month);
- Special Condition 9.1 was inserted, requiring the payment to be made within 15 business days of receiving a payment claim.
On 28 July 2017, Ostwald Bros issued a payment claim for over $6.35 million.
Seymour Whyte replied with a payment schedule on 11 August 2017, in which it admitted it owed $2.50 million.
In a move that it will be regretting, Ostwald Bros delayed serving the Adjudication Application until 27 September 2017. Depending on which of the (1) or (2) due dates above applied, it was potentially going to be made out of time. The NSW Security of Payment Act s 17(3)(d) requires adjudication applications to be served within 20 days of a due date for payment, or they are invalid.
The arguments of the parties
Seymour Whyte argued that the Special Condition should apply (option (1) above). This deadline would have made the adjudication application invalid for being out of time. Option (1) would mean 18 August 2017 was the due date for payment, and therefore the adjudication application deadline was 15 September 2017.
Unsurprisingly, Ostwald Bros argued that option (2) above should apply, which would make the due date for payment 30 August 2017, and so the adjudication application was due on 27 September 2017. Its adjudication application would be valid.
This was a tricky argument to make by Ostwald Bros, as Special Conditions to a contract will usually take priority over General Conditions. Ostwald Bros argued that the courts should “rectify” the contract by deleting Special Condition 9.1. If there was no Special Condition, then the General Condition would apply.
The primary judge agreed with Ostwald Bros, and ordered rectification. Seymour Whyte appealed to the NSW Court of Appeal.
Common law rectification
Common law rectification was discussed but not argued in this case. However, it is useful to know that if an error in a written instrument is clear, and it is clear what a reasonable person would have understood the parties to have meant, then a court will correct the error. An example is where “lessor” is used in the contract, but it is clear that the parties meant “lessee”.
The law sometimes gets a bad reputation for rigidly following the literal meaning of words. However, courts will not do this if this literal meaning is absurd, and the intention of the parties is self-evident.
As Leeming JA pointed out in the case, “even in a formal legal document, the parties will make mistakes which are nonetheless readily identified and corrected.”
Courts in some cases recognise the separate process of equitable rectification. Equitable rectification is a process whereby a court will make a written instrument “conform to the true agreement of the parties where the writing by common mistake fails to express that agreement accurately”.
When argued successfully, it results in the actual intention of the parties overriding the “objective” intention of the parties (what is written in the instrument), a rare thing in contract law.
The Court of Appeal in Seymour Whyte v Ostwald Bros neatly spelled out what a court will (and will not) do when a party argues something went wrong in the contract negotiation and drafting.
A party arguing for rectification must prove three things:
- That at the time of executing the written instrument, the parties to the instrument had an “agreement” in the sense of a common intention; and
- That the parties intended that the written instrument was to conform to this common intention; and
- That the written instrument does not in fact reflect this common intention because of a common mistake.
The parties need not have actually communicated to each other this common intention; courts will look to words or actions.
As will become clear, equitable rectification is a very difficult argument to make. Courts have said that they are wary of rectifying an agreement, based on the logic that if the parties make the effort to write up their agreement, this should end the debate. Courts are also wary about aggrieved parties later claiming that an agreement it signed is inaccurate, to serve its purpose.
To be clear, this is not an argument of miscommunication. To convince a court to rectify a mistake, a party must successfully argue that a common intention was held by all the parties up until execution of the instrument. This common intention must be precise and not general.
Rectification in the case
The director of Ostwald Bros was an important source of evidence of Ostwald Bros’ subjective intention, as he had signed the instrument with the company secretary. However, he was not available to give evidence in court. This may have been fatal to the argument.
The Court considered the negotiating process of the parties. As usually happens in contract negotiation, both parties in their Departures Tables had argued back-and-forth about what the due date for payment should be. Ostwald Bros had initially pressed for “within 10 business days of the end of the month”. Seymour had rejected this, and it pushed for “within 30 business days” as being “Non-negotiable”.
Ironically, in the court proceedings the parties completely reversed their previous positions.
It was almost Seymour Whyte’s undoing that it had written “Non-negotiable” in pushing for 30 days. However, the NSW Court of Appeal was persuaded that in other provisions being negotiated, Seymour Whyte had also written this, and had later agreed to compromise on them. Nevertheless, it was a warning about what parties write during negotiations and how this can come back to haunt them.
Even though Seymour Whyte had sometimes paid Ostwald Bros 30 days from the end of the month, there was no evidence of this being an “invariable practice” or a misapprehension about the terms of the instrument.
Finally, the Court considered that as Items at the end had been ticked in a way that was internally inconsistent, it appeared that the Item 21 deadline of 30 days had been ticked in error.
The Court concluded that there was no case for rectification. Special Condition 9.1 remained in the subcontract, it prevailed over Item 21 and so the adjudication application was made out of time.
Extraordinarily, throughout the three hearings of Seymour Whyte v Ostwald Bros, no party could show the court direct evidence about how the Special Condition 9.1 came to sneak into the contract in the first place. The likeliest explanation was that a Commercial Manager of Seymour Group had instructed the lawyers to prepare a pro forma subcontract, compliant with a NSW government head contract in force at the time of negotiations.
Regardless of what happened, this is the first lesson: stray contractual provisions and special conditions slip through the cracks all the time, especially in the age of “copy and paste”. Lawyers and businesspeople need to be on high alert for this, it can save a lot of anxiety and legal fees.
Clearly the important takeaway is that parties cannot rely on courts fixing what may seem like obvious errors in drafting. Although it can happen, it is difficult and not to mention costly to persuade a court to do this. If there is an error, no matter how small it may seem, it is essential to negotiate a solution with the other party before a dispute arises. Once this happens, parties typically grab at every advantage they can and dig their heels in.
Parties must also be careful about how they talk about the written instruments that they sign. Courts will scrutinise all kinds of behaviour, including negotiating documents and correspondence between the parties, for evidence of intention or for evidence that a mistake has been made in drafting. Parties should negotiate believing that anything they say might later be important in a dispute.
Seymour Whyte may have won, but it was not at all a comfortable victory and slight differences in the negotiations may have changed the outcome of the case.
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