Objective theory of contract: can courts fix a mistake?

The wording of a contract should be expressed in clear language. If a dispute arises and the meaning of a contract is tested, a court will look to what the words of the contract say and not what the parties think those words mean. If one or both parties think that a mistake has been made in the drafting of the contract, there is limited scope for it to be corrected.

Generally referred to as the “objective theory of contract” this approach to contractual interpretation exists in contrast to a regime in which the focus is on the subjective intentions of the parties. Under the objective theory, a court will construe a commercial contract through an assessment of what a reasonable businessperson would understand the language to mean, having regard to the contract as a whole and the context in which it was entered into.

There is, however, limited scope for a court to address mistakes that may be made in the drafting of a contract. At one end of the spectrum, there are obvious mistakes that a court may characterise as giving rise to an absurdity or inconsistency that can be addressed through the principles of construction by changing or adding a word to make sense of a provision in the contract. There are also more complex circumstances in which a court may be prepared to address an alleged mistake in the wording of a contract through the ‘equitable doctrine of rectification’.

Correcting obvious errors through construction

The principles that permit a contract to be construed in a way that recognises that the drafting has “miscarried”¹ have been confirmed in numerous cases, including the decision of the High Court in Fitzgerald v Masters² where it was stated that:

“Words may generally be supplied, omitted or corrected, in an instrument, where it is necessary in order to avoid absurdity or inconsistency”.³

However, the limits to this general principle were spelled out in the recent case of James Adam Pty Ltd v Fobeza Pty Ltd,⁴ where the NSW Court of Appeal clarified that, for a court to construe a contract in a way that requires words to be added, omitted or corrected, the court must be satisfied that:

1. the relevant provision of the contract gives rise to an absurdity or inconsistency that clearly indicates that the parties made an error in the language used in the provision; and
2. the correction to the actual wording of the contract is self-evident.

Both the drafting error and its corrected wording must be obvious. Even if the first limb is satisfied, that is the wording used gives rise to an absurdity, a court will not correct the language unless the corrected wording is also self-evident. If there are multiple possibilities as to how an apparent absurdity or inconsistency can be corrected, a court will not speculate as to the proper resolution of the absurdity or inconsistency.

These limits on the circumstances in which a court will modify the language of a contract reflect the objective basis of contractual interpretation and a realisation that, in practice, contractual drafting is not always perfect. Put another way, the courts will give effect to the clear wording of a contract even if the result may appear unreasonable to one or both of the parties.⁵

Equitable doctrine of rectification

There are two categories of mistake that may support a claim that a contract should be rectified in equity. The first is a common mistake, which requires a claimant to prove that both parties, at the time of signing, had a common intention in relation to part of their agreement that is not reflected in the wording of the contract. If successful, a court can make an order to have the contract rectified to reflect that intention.⁶ The key challenge is proving, to the high standard required by rectification, that both parties held the same intention.

Rectification in the second category of mistake, unilateral mistake, may be granted in circumstances where one party (A) enters into a contract under a misapprehension that the contract contains a particular provision, the other party (B) knows that the contract does not contain that provision and allows A to conclude the contract under that misapprehension in circumstances where equity would require B to take some steps to bring the mistake to A’s attention.⁷ Rectification for unilateral mistake may also be available where the misapprehension of A is that the contract does not contain a particular provision, or where one or both parties mistakenly thought that the words of a contract had a different meaning.⁸

The circumstances in which equity would require a party to bring a mistake to the other’s attention have been identified by reference to the unconscionability or inequitable nature of that party’s behaviour.

In Equititrust Limited v Willaire Pty Ltd,⁹ a lender/mortgagee sent a two-page mortgage document to a mortgagor for signing, but when the mortgagor returned the signed version, it included an additional page with further terms (that were in the mortgagor’s favour) without notification. The lender/mortgagee signed the document, and the mortgage was later rectified on the basis that the mortgagor had acted unconscionably in not drawing the lender’s attention to the additional page.¹⁰

Leibler v Air New Zealand Ltd,¹¹ illustrates a more passive example of unconscionability. The case involved the terms of a share sale and shareholders agreement (agreement) signed in conjunction with the purchase by Air New Zealand of 50% of the shares in Jetset Travel from an entity associated with Isi Leibler (Leibler). Prior to execution, a draft of the agreement included a clause under which Air New Zealand was granted pre-emption rights over the remaining Leibler shareholding in certain circumstances. This clause was mistakenly deleted by Air New Zealand’s solicitors. While there were further discussions related to the pre-emption rights, the court found that Air New Zealand believed that the deleted clause was included in the contract when it was signed. Whilst Leibler did not attempt to obscure the mistake, and indeed it was Air New Zealand’s own solicitors who mistakenly made the deletion, the court held that agreement should be rectified to reinstate the deleted clause. In reaching this conclusion, the court held that Leibler’s failure to draw the deletion of the clause to Air New Zealand’s attention was unconscionable in the context of the parties’ long-term relationship.

Key takeaway

Equitable rectification challenges the principles underlying the objective theory of contact in that it focuses on the subjective state of mind of the parties. As noted in the introduction, a signed contract is assumed to represent the real intentions of the parties and the meaning of a commercial contract is determined through an assessment of what a reasonable businessperson would understand the language of the contract to mean. Courts have therefore been mindful to reinforce that rectification will only allow this principle to be overridden in circumstances where there is “convincing proof” that a contrary position should be reached.¹²

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¹ James Adam Pty Ltd v Fobeza Pty Ltd (2020) 103 NSWLR 850, [2] (Bell P) (James Adam).
² Fitzgerald v Masters (1956) 95 CLR 420.
³ James Adam 426-427 (Dixon CJ and Fullagar J).
⁴ James Adam (2020) 103 NSWLR 850 (Leeming JA).
⁵ Fonterra Brands (Aust) Pty Ltd v Bega Cheese Ltd [2021] VSC 75, [51] (McDonald J) (‘Fonterra v Bega’); Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99, 109 (Gibbs J).
⁶ Simic v New South Wales Land and Housing Corp (2016) 260 CLR 85, [41-42] (French CJ).
⁷ Leibler, Leibant Investments Pty Ltd & Ninth Astjet Pty Ltd v Air New Zealand Ltd & Enzedair Tours Ltd [1999] 1 VR 1, 12 (Kenny JA) (‘Leibler’).
⁸ Fonterra v Bega (n 5) [69].
⁹ Equititrust v Willaire [2012] QSC 206.
¹⁰ Ibid, [76]-[77] (McMurdo J). The lender/mortgagee alternatively sought damages on the basis that the mortgagor had engaged in misleading and deceptive conduct.
¹¹ Leibler (n 7).
¹² Leibler (n 7) 17.