Thomas Southmayd

Dealbreaker: Make a mistake in an important deal - are you in big trouble?

September 22, 2020

This happened in court recently and it caught our eye - two parties (or maybe just the buyer) missed a detail in an agreement that was important to the buyer and clearly not to the seller. Without including it, the acquired asset ended up being useless. This happens more frequently than dealmakers would like to admit. Finding that there’s a critical detail missed is the kind of error that shocks business parties and fills lawyers with dread - because if the parties can’t come to a compromise, they end up in court.In this case, here’s how they solved this problem [Read more]

What exactly happened

A property developer bought a parcel of land to build a number of residential homes, with the condition that the vendor grant access to four sections of the neighboring land (owned also by the vendor), to be included in the deal for the purpose of creating an accessway to the new subdivision. Unfortunately, they needed access to five sections of the adjoining land, and missed including a “sliver” of land. This happened in Canada, although the principles in the case are discoverable in many jurisdictions.

How did the mistake happen?

Mistakes happen - someone must have misread the survey or map! From the facts as described in the court case, it appears as though:

(1) The vendor knew that the deal required this easement

(2) The vendor was willing to give an easement for this purpose

(3) The vendor wanted to make the deal and sell their land

(4) The vendor also knew about the fifth missing section (the sliver) of land but decided not to mention it.

The municipality pointed this error out to the buyer as a problem that had to be solved before their development could proceed.

If you can’t fix your error - you might end up going to court. In this case, the parties ended up in a long and protracted court battle which bounced from the lower court into the court of appeal. The court considered whether they could “rectify” the “error” made in the original agreement - which is a pretty serious decision for the court to make.

What was the outcome?

After going to court, the purchaser first received a decision against them, but persevering, in appeal court, the “sliver” of land was determined to be included.

Rectifying contract errors - is that the role of the court?

The court (in most jurisdictions) is reluctant to step into the shoes of business counterparts or their lawyers, to make contractual decisions that the parties themselves should have made. Loosely, the factors that the court considered before fixing the contractual mistake were:

-The deal assumed the mistaken term was included as a condition that was essential to the deal, and not simply an “aspiration” of one party.

-Both parties acknowledged that the term was part of the deal, and that the term isn’t changed or struck out prior to signing.

-The paperwork made was intended to document the agreed upon deal but missed the item in question.

-The fixed item will solve the paperwork (no new documentation needs to be added, just a simple fix to the existing paperwork).

-The party seeking the remedy has come with “clean hands”. This is an interesting principle - Since the court is trying to solve the contract problem out of a sense of “fairness”, the party seeking the remedy must be acting fairly (i.e. must be honoring their end of the agreement). You can’t cry “fairness” if you’re guilty of fouling your opponent.

-If the mistake isn’t fixed, the vendor would have hoodwinked the purchaser (either intentionally or metaphorically).

Can I read more about this case described here?

You can and should! If you’re looking for more facts of the case, the exact text of the judgement, and/or the specific language used by the court to describe the case that we’ve paraphrased, refer here for more details: https://www.canlii.org/en/on/onca/doc/2020/2020onca273/2020onca273.html

Takeaways

  1. Don’t hesitate to check with your counsel to see what the principles are for court-based-mistake-rectification in your jurisdiction.
  2. Try to negotiate a resolution with your counterparty before going to court. Armed with the principles as noted above, you already have some great arguments to take forward to your counterparty to try and have the agreement issues resolved prior to going to court.
  3. Remember that the paper is intended to be a document that captures your deal decisions that were previously agreed to either verbally or otherwise.
  4. Do your due diligence! Be very careful about the details when making a big acquisition!
  5. Document the essence of the agreement. The things that are important to you about the deal can be contained in your deal “recitals”, conditions precedent, and conditions subsequent sections of your agreement. If you’ve made a mistake, these sections will help guide yourselves as the parties to the deal to discover/re-discover (or for the court do discover) the contract’s essence.
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Written by Thomas.