Rectification: When Everything Goes Wrong

It is sometimes a shock to potential litigants when they discover that generally the Scottish courts will not re-write contracts just because someone has agreed to a bad bargain. However, there is a useful section of legislation that corporate clients do well to have an awareness of.

In terms of section 8 of the Law Reform (Miscellaneous Provisions) (Scotland) Act 1985 it is possible in certain circumstances for the court to rectify contracts (sometimes even missives for purchase or lease of property) where what has been agreed “fails to express accurately the common intention of the parties”.

The decision of Lord Tyre in Albyn Housing Society Limited v Active Air Conditioning Limited, issued on 26th July 2016, is a useful example of the provision at work.

Albyn had entered into a contract with a main contractor called Rok Building Limited for the construction of twenty three houses at Beauly, Inverness-shire. Rok subsequently went into liquidation. It seems that an issue subsequently rose in relation to heat pumps and associated works that had been installed in the properties. Clearly given Rok’s insolvency it would have been impractical for Albyn to achieve any realistic recovery against Rok. A Collateral Warranty Agreement had however been agreed with the subcontractor. An issue arose because the subcontractor’s proper name was Active Air Conditioning Limited. They traded as Active Sustainable Energy Systems and had a non-trading, dormant subsidiary called Active Sustainable Energy Systems Limited. However, the Collateral Warranty Agreement ran in the name of Active Sustainable Energy Solutions Limited. No such company existed.

Albyn sought rectification in terms of section 8 on the basis that clearly the contract did not reflect what had been intended. They produced evidence that a tender had been accepted on the basis that the heat pumps and associated works would be carried out by Active Sustainable Energy Systems Limited and that correspondence had been sent to that company. In the end the Collateral Warranty Agreement seemed to have the wrong name, but the details of the dormant non-trading subsidiary, now in liquidation.

In the circumstances Lord Tyre held that given none of the usual exceptions (for example the courts will not automatically rectify where a third party has acted in reliance on the agreement and would be adversely affected by the rectification) it was right for the court to exercise its discretion (because the application of rectification is discretionary) and rectify the Collateral Warranty Agreement.

Rectification should not be relied upon when drafting contracts but is a useful remedy to be aware of!

Eric Baijal is head of litigation at BBM Solicitors.

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