Rectifying a commercial contract, how do the Courts do it?
If you are the owner of a business, it will be common for you to work with commercial contracts. It is important to note that the terms of a contract do not have to be written down to bind parties and this can often lead to disputes. One party may decide that they want to vary the contract for various reasons such as; they want a better agreement to benefit their business, they believe that the contract does not accurately reflect what they had initially intended when negotiating the agreement, or their business and/or its service offering has evolved.
If there is a dispute between businesses regarding contractual terms that then goes to Court, what method should the Court use to determine how to rectify the contract? A recent case in the Court of Appeal has found that, in the absence of previous written agreements, the Courts will rely on the communications and intentions between the businesses to decide how the contract should be varied. However, if there are previous written contracts and agreements then the Courts will use those previous contracts to assess whether the variations can be made based on what a reasonable observer would consider to be appropriate.
The result of this decision shows that where a party to a contract is unable to rely on a previous agreement, the Courts will use a subjective test to change the commercial agreement by referring to what the parties had initially agreed and participated in. This means the Courts will now look at what was communicated between the parties to the agreement rather than what an objective, reasonable observer would consider to be the consensus amongst the parties to the agreement. In practice, this may be difficult to prove, especially if there is an absence in proof of written or oral communications.
This case has shown that keeping good records of contracts and negotiations can only serve to benefit your business if the words of the agreement are challenged by either party after the agreement has been entered into. It also shows the importance of checking the agreements that your business enters into so that you are sure that the agreement reflects your intentions. The best way to reduce the chance of a costly dispute is to make sure that the parties have Solicitors from the outset and that an agreement is drawn up which accurately reflects both of the parties intentions.
This article is not a definitive statement of the law. It is designed as a free update on the law at the time of publishing. It is not a substitute for legal advice on specific facts and circumstances. BakerLaw LLP and/or the writer accepts no liability or responsibility for reliance on this article and recommends that you seek independent legal advice on your specific circumstances prior to taking any steps.