Correction of a mistake
MILTON KEYNES BOROUGH COUNCIL v VIRIDOR [2017]
Contracts are often negotiated and rushed through to completion in a great hurry to meet an urgent deadline. There is always a fear, particularly where multiple drafts are involved, that the parties will use the wrong document when the time for signature comes. This case should provide some comfort that if such a mistake is made, the Courts will correct the position in appropriate circumstances.
Facts:
- Milton Keynes Borough Council (“the Council”) carried out a public procurement exercise for a waste recycling contract.
- Viridor (“V”) was the successful tenderer and entered into a 15-year contract with the Council. The contract provided for V to pay the Council:
- a fixed payment, which was effectively rent for an existing recycling facility; and
- a variable payment representing a share of V's profit.
- The draft contract documents that the Council sent out included an Income Generating Payment Mechanism document (“IGPM”), which contained blank spaces to be completed by the tenderers, including one for the fixed payment. When V submitted its final bid, it had filled in the blank spaces to provide that the fixed payment would be £500,000 “indexed for inflation”.
- The Council selected V as the successful tenderer on the basis of its final tender. However, the contract documents that were compiled for signature by the parties included a version of the IGPM with the spaces still blank. It did not state the amount of the fixed payment and made no mention of it being indexed for inflation.
- The contract was in place for some years, with V paying a fixed rent of £500,000 without indexation. The error was only discovered during an audit of the Council's contracts, but V, somewhat surprisingly some might say, denied that the fixed payment should be indexed.
Decision:
- The judge ordered correction or, to use the legal term, ‘rectification’, of the mistake in the contract. This is a remedy whereby a Court orders a change in a written document to reflect what it ought to have said in the first place. The order was for rectification as a consequence of ‘common mistake’, which is where both parties erroneously believe the document gives effect to their common intention. Alternatively, there was a rectification ordered on the basis of ‘unilateral mistake’, which is where one party mistakenly believes that the document accurately recorded the agreement, while the other knows of this mistake and takes unconscionable advantage of it.
- The established test for common mistake has three elements which the Court applied to the facts. It found that there was a:
- common intention between the parties - the Council invited V to propose the fixed payment, V did so and the Council accepted that tender without qualification;
- outward expression of accord - the fixed payment was part of the submitted tender, which was accepted;
- continuing common intention when the contract was signed - there was no negotiation about the fixed payment after the tender was accepted and the Court rejected any suggestion that V entered into the contract believing that indexation would not apply to the fixed payment.
- V had suggested that the mistake was so ‘obvious and major’ that it could not have been a mistake at all. The Court rejected this argument saying that the factual evidence about how the mistake happened in this case was ‘compelling’.
- The Court also noted that the IGPM with blank spaces rendered the contract inoperable. This was another argument in favour of correcting the mistake.
- It was emphasised that the aspect of the Court’s judgment relating to unilateral mistake only became relevant if the Court was wrong in finding a common mistake. It found that if V knew about the mistake before the contract was signed and omitted to alert the Council, that was because V would benefit from the mistake. Accordingly, a claim for rectification based on unilateral mistake would succeed if that was established.
- V's argument that the contract's entire agreement clause prevented rectification was rejected.
- The Court examined post-contract events to see whether the Council was guilty of delay or acquiescence which might prevent its rectification claim. In doing so, it considered how the contract was performed, meetings between the parties, invoices issued by the Council and events that occurred after the error was discovered. Any delay ran from the point when the Council realised the mistake. On the facts, the Court found nothing to justify it denying a claim to correct the mistake.
- V also failed to prove that the Council, “acquiesced in the proposition that indexation would not be charged on the fixed payment for the full 15 years of the contract ”.
Point to note:
- Whilst there is a self-evident need for care when compiling a bundle of contract documents for signature, this case demonstrates that the Courts will provide assistance in relevant situations and a party who seeks to take unfair advantage of an obvious mistake should think very carefully before doing so.