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Make no Mistake, Misrepresentation can be a problem

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31/03/2021

Development contracts and disputes

There are many types of contracts relating to the development of land and property. These commonly include promotion agreements, joint venture arrangements, overage provisions, agreements for sale and options to purchase, amongst others.

It should go without saying that, when negotiating any development or commercial deal, it is important to ensure that the completed contract reflects both parties’ intentions and understanding.  However, it is unfortunately quite common for parties to discover, after the event, that a contract does not actually say what, or work in the manner, it should.

So, what are the options where contracts do not reflect what the parties intended?  Walker Morris’ Claire Acklam, a Senior Associate solicitor specialising in the resolution of commercial and development disputes, offers practical advice for correcting contracts following a mistake in the drafting or misrepresentation by one of the parties.

Mistake

At the outset of any commercial arrangement or development deal, parties are keen to get on with doing business together.  That can mean that contracts can be prepared and completed too hastily or without due care and attention.  Mistakes can arise – whether that be as a result of a last minute rush to complete, misunderstanding, miscommunication, drafting error or oversight, or the like – even in cases where arrangements are meticulously documented in formal, written contracts.

A mistake in a contract can be corrected by consent (that is, by agreement between the parties), by contractual construction (that is, by a court declaration as to the correct meaning of the contractual wording) or by the legal remedy of rectification.

Rectification allows the retrospective correction of a written contractual document because it does not reflect the terms of a true contract at the time it was made. The failure to correctly record the parties’ agreement must be as a consequence either of a mistake common to both parties whereby the contract does not record the terms as both intended (known as “common mistake”), or where one party is aware of the mistake and fails to draw attention to it to the other (known as “unilateral mistake”).

Rectification claims are notoriously difficult, not least because convincing proof is required to counteract the very strong, primary evidence of the parties’ intention as displayed by the written contract itself.

Crucially, a claimant must show that there was an outward expression of accord, such as conversations or correspondence between the parties, or non-binding heads of terms/agreement.  An intention held by the parties but not communicated between them is not enough.

In addition, rectification is an equitable remedy. It is therefore discretionary and, when exercising its discretion, the court will apply certain principles of fundamental justice, including the equitable maxim of ‘clean hands’ (that is, anyone looking to equity for a remedy must be free of wrong doing him/herself); and the doctrine of ‘laches’ (that is, delay can cause unfairness in itself and so an equitable claim may be barred if it is not brought within a timely manner).

Misrepresentation

When parties consider doing business together, there are usually a multitude of enquiries, discussions and negotiations that take place before any contract is entered into. As part of any pre-contract process a myriad of representations are made, many of which can give rise to a liability. It is important for any business to understand the types of statement and representations that can found the basis of a claim when a contract goes wrong.

A misrepresentation is an untrue statement of fact or law upon which a party relies in being induced to enter a contract, causing the relying party to suffer loss. It can be an express written or oral statement; implied by words or by conduct; made when making plans or projections for the future; arise via half truths; or arise where a statement was true when it was made but later becomes untrue if circumstances change.

Misrepresentation is a complex area of law comprising common law, equity and statute and includes contract and tort.  There are different types of misrepresentation, each giving rise to different remedies for the party who has suffered loss.  For example:

  • Fraudulent misrepresentation is the most serious and requires a false representation to have been made knowingly, without belief in its truth, or recklessly as to its truth. The claimant may have the contract set aside (or ‘rescinded’) and seek unlimited damages.
  • A claim for negligent misrepresentation under section 2 (1) of the Misrepresentation Act 1967 (MA) is available, in addition to any possible breach of contract claim, where a misrepresentation was made carelessly or without the representor having reasonable grounds for believing its truth.
  • An innocent misrepresentation occurs where the maker can show that he had reasonable grounds to believe a statement was true.

Where the claim relates to negligent or innocent misrepresentation [1], the court has a discretion under section 2 (2) of the MA to award rescission of the contract or damages in lieu.

The different characteristics of and remedies for misrepresentation claims mean that potential claimants must ensure that any claim is formulated correctly.  Specialist advice will be required in the majority of cases.

Practical Advice

So, what should you do if you face an unintended (and probably unfavourable) outcome in any of your contracts?

  • Start with the wording in the contract itself. If there is genuine uncertainty, then commercial common sense may be taken into account and may assist.
  • Is there any scope for settlement with the other party? It is rare for any contractual interpretation dispute to be clear cut. Even if the odds are against you, the chances are that any grey area and inevitable litigation risk can be exploited in negotiations to encourage a commercial compromise.
  • In any event, it is good to talk. Interpretation disputes often arise by virtue of the fact that there is an ongoing contractual relationship between the parties. It can be in the interests of all concerned for the parties to behave in a reasonable and commercially sensible manner.
  • If the wording in the contract is clear and produces an unusual outcome, then it may be sensible to consider whether there has been a mistake in the drafting of the contract? Ask whether the clause genuinely reflects the parties’ intentions at the time the contract was entered into? If it does not, take specialist legal advice to investigate the potential to pursue a claim for rectification.
  • Alternatively, ask whether the clause was entered into in reliance on any misrepresentations? If so, subject to any potential express exclusions/limitations, the contract could be set aside and financial compensation could be payable.
  • Finally, consider whether you were properly advised when the contract was completed. It is possible that any losses could be recouped via a professional negligence claim in the case of either mistake or misrepresentation.

How we can help

Claire Acklam advises on all forms of developer disputes, both from a pre-emptive risk management perspective and when it comes to resolving issues after they have arisen. If you have any queries or concerns in relation to contractual interpretation, mistake or misrepresentation, or if you would like tailored advice or assistance in relation to any development related dispute, please do not hesitate to contact Claire, who will be very happy to assist.

 

[1] and where liability for misrepresentation has not been excluded or limited by the insertion of appropriate exclusion, non-reliance or ‘entire agreement’ clauses to the contract.  Please see our earlier article for further information.

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