The Great Rectification: What You Knew and Said Before You Signed an Agreement Might End Up Changing It
- Tali Green
by Tali Green
In 2484234 Ontario Inc. v. Hanley Park Developments Inc., the Court of Appeal for Ontario (“ONCA”) ordered that an agreement of purchase and sale (“APS”) be rectified, or changed, to include a fifth parcel of land that was not mentioned anywhere on the face of the APS because, the ONCA found, the parties had previously “agreed” that the fifth parcel was included.
In its decision, the ONCA emphasized that a contract will be rectified where there is a variation, or difference, between the executed contract and the parties’ “prior agreement”. The ONCA explained that this variation can arise when one considers not just the words of the prior agreement, but also its surrounding circumstances. Crucially, the ONCA noted that statements made during negotiations that allocate risk among the parties can be considered a representation and warranty in the prior agreement, even if the parties did not specifically refer to those statements as such.
Hanley Park, the “Purchaser” is a subdivision developer. To receive municipal approval of the development, the Purchaser was required to build an access road (the “Access Road”) from the subdivision to an existing road. The Access Road would have to be built on land owned by 2484234 Ontario Inc, the “Vendor”.
The Purchaser and Vendor entered into an APS for the four parcels of the Vendor’s land that the Purchaser thought would be sufficient to build the Access Road (“Parcels 1-4”). Prior to executing the APS, the Vendor’s lawyer sent the Purchaser’s lawyer a letter (the “March 7th Letter”) that outlined the terms of the parties’ agreement.
Two statements in the March 7th Letter were crucial to the ONCA’s decision:
- that the Vendor’s engineer had confirmed that Parcels 1-4 “will be sufficient for the road which is to be built to access the subdivision”; and
- that the Vendor was also conveying temporary easement over Parcels 1-4 “so as to facilitate the proposed subdivision” until severance is obtained.
Another crucial fact, which emerged during discoveries, was that the Vendor had known at the time of entering into the APS that Parcels 1-4 would not be sufficient to build the Access Road.
After executing the APS, the Purchaser realized that Parcels 1-4 were not sufficient and that it would need to purchase Parcel 5 from the Vendor in order to build the Access Road. The Vendor refused to sell Parcel 5. The Purchaser brought an unsuccessful application for rectification, which was overturned in this appeal.
A Brief Note on Rectification
Rectification is an equitable, as opposed to a legal, remedy. An equitable remedy allows the courts to interfere with a party’s legal rights when allowing a party to take advantage of those rights would be unconscionable or unfair. Rectification is considered a particularly “potent” remedy since it allows a party to impose, through a court order, an agreement on the other party that is not what the parties had formally agreed upon.
The ONCA’s Analysis
The scope of rectification
The ONCA emphasized that rectification can only to be used to correct the legal instrument in which the parties’ agreement has been recorded, and not the underlying agreement itself. In other words, it can only be used to restore the parties to their original bargain, or the “prior agreement” and cannot be used to correct an improvident bargain.
The test for rectification
To determine whether the Purchaser was entitled to rectification in this case, the ONCA invoked a six-part test for rectification outlined in Canada (Attorney General) v. Fairmont Hotels Inc:
(i) The parties had reached a prior agreement whose terms are definite and ascertainable;
(ii) The agreement was still effective when the instrument was executed;
(iii) The instrument fails to record accurately that prior agreement; and
(iv) If rectified as proposed, the instrument would carry out the agreement.
(v) the party resisting rectification knew or ought to have known about the mistake; and
(vi) permitting that party to take advantage of the mistake would amount to ‘fraud or the equivalent of fraud’.
Part (iii) of the rectification test: was there a prior agreement and what did it mean?
The ONCA focused most of its discussion on the lower court’s finding that the Purchaser had not met part (iii): whether the APS failed to accurately record the parties’ prior agreement.
In deciding that it disagreed with the lower court, the ONCA broke this issue down into three questions: 1) whether the parties had a Prior Agreement, 2) if so, what were the terms of that Prior Agreement, and 3) what did those terms mean?
At the outset, the ONCA confirmed that the prior agreement need not be a binding agreement or contain all of the relevant terms of a complete agreement. It must only “express the parties’ agreement on specific terms, and do so in a way that is definite, ascertainable, and continuing.”
While the lower court had also found there to be a prior agreement, it did not identify a particular document in which that agreement could be found and simply concluded that “no representations or warranties were provided with respect to the required [Parcels] for the access road.”
The ONCA took a completely different approach to the parties’ pre-execution negotiations. It found that the March 7th Letter represented the parties’ prior agreement and that its words and surrounding circumstances were key to understanding that prior agreement.
With respect to the words of the March 7th Letter, the ONCA zeroed in on two statements made by the Vendor: 1) that the Vendor’s engineer considered Parcels 1-4 to be sufficient and 2) that the temporary easement the Vendor offered over Parcels 1-4 was to “facilitate the development of the proposed subdivision.”
The ONCA noted that the Vendor’s lack of disagreement with the engineer’s assessment implied that the Vendor did not disagree and that, upon acceptance of the March 7th Letter, the assessment would become part of the prior agreement. Similarly, the ONCA considered the reference to development plans as indicating that the Parcels being sold are a function of their sufficiency to build the Access Road for development purposes. The ONCA explained in that regard that the use of language that ties that which is being sold to the purpose for which it is being sold indicates that the purpose of the sale was not merely an aspiration or “intended effect”, but rather part of the terms of the prior agreement itself.
This led the ONCA to conclude that the aforementioned terms in the March 7th Letter “allocate risk between parties” and have the same effect as representations and warranties, though the Vendor never referred to them as such.
In determining whether the March 7th Letter allocated to the Vendor the risk of Parcels 1-4 being insufficient for the Access Road, the ONCA considered the following:
- When the Vendor advised of its engineer’s assessment as to the sufficiency of Parts 1-4 without disagreeing with that opinion (as it would have been obliged to do had it disagreed, pursuant to it duty of honest performance), the Purchaser could reasonably infer that the Vendor agreed with its engineer;
- To interpret the March 7th Letter as only conveying Parcels 1-4, “even if they were known by A to be insufficient and incapable of facilitating development” would result in a commercial absurdity, which must be avoided;
- The March 7th Letter was in “response to a direct request of the [Purchaser]” for the parts of the Vendor’s land that would allow the Purchaser to build the Access Road.
Having found that the March 7th letter allocated the risk of insufficiency of Parcels 1-4 upon the Vendor, the ONCA further concluded that the obligation to convey Parcel 5 was an implied term of the March 7th Letter, even though Parcel 5 was not mentioned anywhere in the March 7th Letter or, of course, the APS. This implied term, the ONCA reasoned, was necessary to give business efficacy to the March 7th Letter’s representation and warranty that Parcels 1-4 were sufficient to build the Access Road. In other words, the ONCA found that the Vendor, having promised to convey Parcels 1-4 on the basis that they were sufficient, “was obligated to do what was necessary” to make them so, including to convey Part 5.
Meeting the Rest of the Rectification Test
Now that the March 7th Letter contained a representation and warranty that Parcel 5 would be conveyed if Parcels 1-4 were insufficient, the ONCA concluded that part (iii) of the rectification was met because the APS varied from the March 7th Letter: it did not provide for a sale of Parcel 5.
The ONCA found that the buyer had also met part (vi) of the rectification test, because allowing the Vendor to remain silent with the knowledge that the buyer had made a mistake about the terms of the APS (ie, that Parts 1-4 would be sufficient) amounted “to a fraud or the equivalent of a fraud”.
Parties should avoid making statements during negotiations that can be construed as allocating to themselves risks of important unknowns or contingencies. One way to do this is to properly qualify statements of which the party is not certain.
A party should also seriously consider whether its contracting partner is entering into the contract with notions or beliefs that the former knows are false or inaccurate.
Finally, disputing parties should remember that rectification, or changing the contract, may be available where the words of the contract differ from an interpretation of the parties’ prior agreement that takes into account both the prior agreement’s language and surrounding circumstances.
1 Canada (Attorney General) v Fairmont Hotels Inc., 2016 SCC 56, at paras 12-13
2 2484234 Ontario Inc. v. Hanley Park Developments Inc, 2019 ONSC 3696, at para 38.