21 November 2013

You get a horrible sinking feeling when you pick up a contract that doesn’t say what you thought it did. But if the draftsman got it wrong, are you bound by the written terms, even if neither party intended that?

The shipping case of DS-Rendite-Fonds Nr.106 VLCC Titan Glory GmbH & Co. Tankschiff KG & Ors V Titan Maritime SA & Ors (2013) recapitulates some points on how to correct mistaken drafting where it fails to reflect the intentions of the parties – “mutual mistake” (there is a whole other area of law which deals with mistakes by only one party).

Mutual mistake is where one or other party to a contract raises an argument that the written agreement does not reflect the intention of the parties and should be amended. The detail can be challenging and depends on the facts of each case. However, as a very general guide:

  • Mutual mistake arises if the intention of the parties has not been correctly recorded in the contract.
  • The relevant time is when the contract is entered.
  • The question is what an objective observer would have thought the intentions of the parties to be.
  • The requirements are as follows:
    • The parties had a common continuing intention, whether or not amounting to an agreement, in respect of a particular matter in the instrument to be rectified.
    • Which existed at the time of execution of the instrument sought to be rectified.
    • Such common continuing intention to be established objectively, that is to say by reference to what an objective observer would have thought the intentions of the parties.
    • By mistake, the instrument did not reflect that common intention.
    • Subjective intentions (ie actual intentions which were not communicated) are consequently not relevant (except perhaps as evidence of what the objective communications might have included).
  • The requirements of 'an outward expression of accord' and 'common continuing intention' are not separate conditions, but two sides of the same coin, since an uncommunicated inward intention is irrelevant.

The Court of Appeal has given the following example scenarios:

  • The parties share a subjective and objective intention and this is not reflected in the contract – rectify.
  • The parties do not share a subjective intention but their communications evidence an objective intention which is recorded in the final agreement – do not rectify.
  • The parties objectively share an intention, but one changes its mind without communicating the change of mind – rectify to the (prior) objective intention.
  • The parties objectively share an intention, one changes its mind and communicates the change of mind which is then recorded in the written agreement – do not rectify.

Even if these conditions are not met (ie there is no 'mutual mistake') it is in some cases possible to rectify a contract where there has been a simple typographical error or where one party has entered the contract under a mistaken understanding or following an untrue statement from the other party.

In the above case, a shipowner was able to have the minimum payment terms in a charter contract amended because it was clear that both parties had intended (objectively and subjectively) that a certain minimum figure apply. The Defendant was unrepresented, so it would have been quite surprising if the Claimant had failed.

Ian Tucker comments on emerging issues from a litigation perspective.

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