Correctly recording the name of a contracting party within written documentation sounds elementary. However, the reality is that in the modern corporate age, where companies within the same group often use very similar names to one another and further compound confusion by using generic trading names, identifying the appropriate contractual party is not so straightforward. Naming the wrong party in a contract can be very problematic, as it could well mean the counterparty is unable to enforce contractual rights and in certain circumstances can completely transform the nature of the bargain they believed they were entering into. However, if such a mistake proves beneficial to the counterparty, they will likely seek to uphold the agreement as recorded.
Where there is disagreement between contracting parties as to the terms of a written agreement, the first task of the courts will be to examine the written contract and determine what bargain the parties had intended to enter into. Given the sanctity of contracts and the importance of certainty, the default position will be that a party is bound by those provisions contained in a written agreement it has signed. The House of Lords decision in Chartbrook v Persimmon Homes [2009] can be regarded as a leading authority in situations where ‘something has gone wrong with the language’ in a contract. It is clear from that case that, where possible, contractual provisions will be interpreted in accordance with what the parties are considered to have intended. However, it is also apparent from that decision that there may be instances where a party claims that the written contract is incapable of being so construed, perhaps because the contract is unambiguous but incorrectly records what the parties meant. In such circumstances the remedy of rectification may be available as a last resort.
The purpose of rectification is to correct the written instrument so as to accurately represent the agreement between the parties. However, rectification will only be ordered in limited circumstances. As the recent decision in Liberty Mercian v Cuddy [2013] demonstrates, rectification may be refused even where one party to the contract mistakenly used the name of a dormant company within the group of companies with which it intended to contract, rather than the company that was to perform the work envisaged by the contract. The judgment of Mr Justice Ramsey provides us with a useful overview of where rectification might be ordered and the tests applied in determining that issue.
LIBERTY MERCIAN V CUDDY
In Liberty Mercian, the High Court had to consider a number of issues, including whether to order rectification of a written agreement which, according to the claimant, named the incorrect party: the contract recorded the name of a dormant company, Cuddy Engineering, within the defendant group of companies, instead of the company that had already commenced work for the claimant, Cuddy Demolition. The claimant, Liberty Mercian, sought to establish, among other things, that the naming of the dormant company was a misnomer, or had otherwise been a mistake of the kind that would give rise to rectification.
The facts
Liberty Mercian sought to construct a new retail plateau that would be used to site a new Sainsbury’s supermarket. The construction work was to be contracted out and contractual negotiations commenced between representatives of Liberty Mercian and those of a company trading under the name ‘the Cuddy Group’, which was found to be the trading name of Cuddy Demolition.
In November 2009, Liberty Mercian received a tender form to carry out the construction work naming the contractor as ‘Cuddy Group’. Liberty Mercian subsequently sent a letter of intent to ‘Cuddy Group’ in January 2010, after which Cuddy Demolition commenced construction work. At this point no formal contract had been agreed, but it was understood that the parties would rely on the terms of the letter of intent until a formal agreement was executed.
Shortly after Cuddy Demolition had started the work, Liberty Mercian’s solicitors informed Sainsbury’s that the party to be named in a warranty between Liberty Mercian, Sainsbury’s and the construction company, was to be Cuddy Engineering. That warranty was finally executed in April 2010 and named Cuddy Engineering as the contractor. Later the same month, Cuddy Demolition provided Liberty Mercian with an invoice for works it had performed that stated explicitly they were Cuddy Demolition invoices.
In May 2010, a version of the formal written contract for the construction was signed by a common director of both Cuddy Demolition and Cuddy Engineering, which was stated as being signed on behalf of ‘Cuddy Group’. However, Liberty Mercian subsequently commented that the agreement should be signed by directors of Cuddy Engineering. This request was complied with, and the contract was dated 6 July. After that date Liberty Mercian sent a copy of certain pages of the agreement that replaced the term ‘Cuddy Group’ with Cuddy Engineering within the definition of ‘contractor’.
There were problems with the construction work in November 2011 and Liberty Mercian addressed a letter to Cuddy Group providing it with notice of the breach of contract and requesting that it comply with its obligations. In January 2012, Liberty Mercian notified ‘Cuddy’ of its intention to terminate the contract due to Cuddy not having remedied its breach. In response, Cuddy Engineering stated that Liberty Mercian had not been entitled to terminate and asserted that its action amounted to a repudiatory breach of the contract.
Liberty Mercian sought a declaration that the contracting party was Cuddy Demolition and that Cuddy Demolition was therefore liable to deliver on certain guarantees and warranties. Liberty Mercian’s primary position was that the contract had come into existence in May and that the contracting party had been Cuddy Demolition. However, it argued that if Cuddy Engineering was found to be the named contracting party, then rectification should be given because the reference to Cuddy Engineering was a misnomer, or because there had been a common or unilateral mistake.
Formation of contract
Liberty Mercian sought to establish that the contract had been entered into between it and Cuddy Demolition as at May 2010, while the defendant companies argued that the contract had not come into existence until July 2010.
The Court found that the proffering of documents by Liberty Mercian did not constitute an offer, which was subsequently accepted when a representative of the defendants signed the documents. Instead, the Court held that a contract only came into existence on the signature of both parties, so that the first signature constituted the offer, and the final (second) signature constituted acceptance.
While this finding is interesting in its own right, it will not be considered in further detail here. It is sufficient to say that Mr Justice Ramsey concluded that the contract had come into existence on 6 July 2010, and at that time he found that the contract, on its proper construction, named Liberty Mercian and Cuddy Engineering as the contracting parties.
Misnomer
Mr Justice Ramsey considered a number of authorities to determine whether rectification for misnomer was available in the circumstances. However, he considered that all of the authorities to which he referred had to be considered in light of the House of Lords decision in Chartbrook.
In Chartbrook, Lord Hoffmann accepted, albeit with two qualifications, that the test for correcting mistakes of construction was that stated by Lord Justice Brightman in East v Pantiles (Plant Hire) Ltd [1981], namely that:
‘… first, there must be a clear mistake on the face of the instrument; secondly, it must be clear what correction ought to be made in order to cure the mistake’.
Lord Hoffmann’s qualifications to this test were: that the task of construing contractual terms and correcting mistakes were part of the same exercise; and that in determining whether there is a clear mistake ‘on the face of the instrument’ the court should take into consideration the contractual background and context. However, Lord Hoffmann also made clear that the courts ‘should not readily accept that people have made mistakes in formal documents’.
With this in mind, Ramsey J revisited those authorities that Liberty Mercian had relied upon and with which it drew comparisons to the circumstances in this case. One such case was Nittan v Solent Steel [1981] where an insurer had inserted the wrong company name into an insurance policy. The insurer had included the name of a dormant company instead of a company within the same group trading under a similar name. In that case, the insurers had taken the name of the dormant company from brochures that had been sent to them, notwithstanding that the company was by that time out of business. Ramsey J noted that the naming of the dormant company in Nittan had been a ‘clear mistake’ because it was well known to all the parties that the reference within the contract should actually have been to the trading name of the active company.
Despite the fact that Cuddy Engineering was also a dormant company, Ramsey J was unwilling to find that its inclusion in the contracting party had been a misnomer. Ramsey J accepted that until the end of May, all relevant matters had involved Cuddy Demolition (taking into account that references to Cuddy Group were essentially references to Cuddy Demolition). However, he found that at the end of May, Liberty Mercian had requested that the name Cuddy Group be changed to Cuddy Engineering. Ramsey J also took into account that Liberty Mercian’s solicitor had become aware of Cuddy Engineering after performing a company search which had subsequently led to Cuddy Engineering providing the warranty provided to Liberty Mercian and Sainsbury’s. He noted that the defendants cannot have been aware of the internal communications of Liberty Mercian and they would only have been aware of Liberty Mercian’s request to change the name to Cuddy Engineering and the fact that the warranty had been requested from Cuddy Engineering. Consequently, Ramsey J found that the inclusion of Cuddy Engineering in the formal contract in July 2010 cannot be said to have been a clear mistake against the factual background.
Mistake
Ramsey J said that the starting point for those principles applicable to mistake and rectification was to look at the comments of Lord Justice Gibson in Swainland Builders v Freehold Properties[2002], which were restated by Lord Hoffmann in Chartbrook. Gibson LJ said that the party seeking rectification must show that:
‘1) 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;
2) there was an outward expression of accord;
3) the intention continued at the time of the execution of the instrument sought to be rectified;
4) by mistake, the instrument did not reflect that common intention.’
An important consideration in applying Gibson LJ’s test is how the parties’ intentions are to be determined. On that point, Ramsey J referred to Lord Hoffmann’s statement in Chartbrook, where he had said that the intentions of the parties would be determined by considering what the objective observer would have thought the intentions of the parties were. This approach was followed by the Court of Appeal in Daventry District Council v Daventry and District Housing Ltd [2012], although in that case Lord Neuberger pointed out that a different approach is used when considering rectification when contrasted to that taken with interpretation. He also stated that in claims for rectification, the Court was entitled to take into account antecedent negotiations and the subjective intention or understanding of the parties.
In Liberty Mercian, Ramsey J had to consider whether there had been a common continuing intention up until the contract was entered on 6 July 2010 that Cuddy Demolition was the party to enter into the contract. He accepted that there had been a common continuing intention until 26 May, at which point Liberty Mercian had communicated to the defendants that Cuddy Engineering should be the contracting party. So the question boiled down to whether the communication on 26 May, and the amendments that were made subsequent to the signing of the contract, to clarify that the contracting party was Cuddy Engineering, represented a new common intention, or a mistake. Ramsey J found that:
‘… a hypothetical reasonable objective observer, aware of the facts known to both parties, would conclude that there had been no mistake’.
On that basis, Ramsey J found that a new common intention had been formed whereby Cuddy Engineering would be the contracting party, which replaced the previous common intention that Cuddy Demolition would be the contractor.
In the absence of a common continuing intention that was at odds with what had been recorded in the contract, no question of rectification arose.
Liberty Mercian had argued, in the alternative, that there had been a unilateral mistake, which would also allow the contract to be rectified, on the basis that the defendants had been aware of Liberty Mercian’s mistake.
In order to establish a case of unilateral mistake, Ramsey J considered the level of knowledge that Liberty Mercian had to show the defendants had of the mistake. He again referred to the case of Daventry in which Lord Justice Etherton had made clear that the rectification for unilateral mistake required the defendant to have knowledge falling within one of the first three categories described by Mr Justice Gibson in Baden v Societe Generale [1993], those being (1) actual knowledge, (2) wilfully shutting one’s eyes to the obvious, or (3) wilfully and recklessly failing to make such enquiries as an honest and reasonable person would make.
Ramsey J concluded that the evidence did not come anywhere near to establishing that the defendants had knowledge amounting to categories one to three in Baden and as such there could be no unilateral mistake. Consequently rectification was not granted.
Conclusion
The consequence of rectification not having been ordered was to prevent Liberty Mercian being able to enforce rights under the contract against Cuddy Demolition, such as performance bond and warranties. Instead, it was left with rights that were only enforceable against a dormant company.
It is notable that the naming of Cuddy Engineering was not deemed to amount to a mistake from an objective point of view, notwithstanding that it was a dormant company. However, the Court could not look past the fact that Liberty Mercian had expressly requested that the company be named as the contractor, and had also named the company in the warranty. Therefore, while it may have been apparent on the facts that Liberty Mercian had been mistaken, the defendants were not to know this. Although they may have considered it strange that Cuddy Engineering was to be named as the contractor, they were entitled to act upon the express request and rely upon it as reflecting the intention of Liberty Mercian.
COMMENT
Rather than concluding simply that parties to a contract should ensure that key terms of the contract and, in particular, the parties’ names are accurately recorded so that the written contract represents the bargain that they seek to enter into – it is perhaps more helpful to consider how that can be done or, at least, consider how a party may best protect itself in the event the written contract does not accurately record the bargain it had sought to enter into.
When it comes to naming the correct contractual parties, it is important to properly understand the company formation of the entity with which you are seeking to contract. The most efficient way of doing this will likely be to raise the issue in correspondence with the other party before entering into any binding agreements and, where necessary, carrying out company searches on all relevant entities. In particular, one should ensure that the contracting party is active and it is advisable to refrain from using a company’s trading name. Of course, there may be instances where the other party intentionally uses a trading name that makes it difficult to ascertain the true legal identity and/or where that other party does not make it clear which entity is to be party to the contract. Conduct of that sort should trigger alarm bells, and prompt direct questioning to clarify any uncertainty. Where certainty cannot be achieved, it may be more prudent to walk away.
It is important to keep in mind that the courts’ approach to clarifying uncertainty surrounding a contract is to take an objective approach and consider things from the perspective of a reasonable observer, albeit having the same knowledge as the parties. Accordingly, parties should be aware of how pre-contractual communications are likely to be perceived from the outside looking in: any requests for specific contractual terms or amendments should be considered in the wider context of the agreement; and where uncertainty arises as to whether something is accurately described in the written agreement, this should be clearly flagged and addressed between the parties as appropriate.
Where a party finds itself in a situation where the contract does not accurately describe what it intended, it should consider seeking legal advice in the first instance to determine whether a claim for rectification might be available. Given the objective tests that are applied in determining whether rectification should be ordered, a party must also take into account the specific facts and background, as it will often prove to be a complex question of fact dictated by the given circumstances.
By Christopher Pease, associate, Edwards Wildman Palmer UK LLP.
E-mail: cpease@edwardswildman.com.