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Contracts - Mistake and Rectification
MORE CASES
Part 2
. 2484234 Ontario Inc. v. Hanley Park Developments Inc.
In 2484234 Ontario Inc. v. Hanley Park Developments Inc. (Ont CA, 2020) the Court of Appeal comments on rectification of a contract:[2] Rectification is an equitable remedy available to correct a document that fails to accurately record the parties’ true agreement. It is not available to correct an improvident bargain or to fill a gap in the parties’ true agreement, even when the omission defeats what one (or both) of the parties was seeking to achieve. As an equitable remedy, it is also not available when the party seeking it does not have “clean hands”.
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[26] In addition, the application judge held that the appellant’s claim did not meet the test for rectification applicable to a case of unilateral mistake (a case where the assertion is that one party was mistaken about the terms of the formal document even though the other party was not). She articulated the test for rectification set out by the Supreme Court of Canada in Canada (Attorney General) v. Fairmont Hotels Inc., 2016 SCC 56, [2016] 2 S.C.R. 720, at paras. 31-32 of her reasons, as follows:In Fairmont, the Supreme Court of Canada held that, where the error of the instrument results from a common mistake, rectification of an agreement is available upon the court being satisfied that,(i) The parties had reached a prior agreement whose terms are definite and ascertainable;
(ii) The agreement was still effective when the instrument was executed;
(iii) The instrument fails to record accurately that prior agreement; and
(iv) If rectified as proposed, the instrument would carry out the agreement. In the case of a unilateral mistake, Fairmont also held that, in addition to the four requirements set out above, the court must also be satisfied that,(v) the party resisting rectification knew or ought to have known about the mistake; and
(vi) permitting that party to take advantage of the mistake would amount to ‘fraud or the equivalent of fraud’. [See Fairmont, at paras. 14-15.] ....
[29] The parties agree that the application judge correctly set out the test for rectification and correctly treated the appellant’s claim as requiring fulfillment of all six elements set out in para. 26 above (as the appellant’s claim was one of unilateral mistake). The parties also agree that rectification is an equitable remedy that can be denied to a party under the clean hands doctrine.
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(1) Parameters of the Rectification Remedy
[34] The six-step test articulated in Fairmont is best understood in light of the discussion in that case about the parameters of the rectification remedy. Writing for the majority, Brown J. underscored the importance of distinguishing between what rectification can do, which is correct a document to accord with what was agreed, and what it cannot do, which is change an agreement to make it achieve a party’s desired result:Rectification is limited to cases where the agreement between the parties was not correctly recorded in the instrument that became the final expression of their agreement [citation omitted]. It does not undo unanticipated effects of that agreement. While, therefore, a court may rectify an instrument which inaccurately records a party’s agreement respecting what was to be done, it may not change the agreement in order to salvage what a party hoped to achieve: Fairmont, at para. 3. [35] At para. 13 of Fairmont, Brown J. stressed that while rectification corrects mistakes in the recording of a prior agreement, it is not available to correct mistakes in the prior agreement itself:It bears reiterating that rectification is limited solely to cases where a written instrument has incorrectly recorded the parties’ antecedent agreement (Swan and Adamski, at §8.229). It is not concerned with mistakes merely in the making of that antecedent agreement: E. Peel, The Law of Contract (14th ed. 2015), at para. 8-059; Mackenzie v. Coulson (1869), L.R. 8 Eq. 368, at p. 375 (“Courts of Equity do not rectify contracts; they may and do rectify instruments”). In short, rectification is unavailable where the basis for seeking it is that one or both of the parties wish to amend not the instrument recording their agreement, but the agreement itself. More to the point of this appeal, and as this Court said in [Performance Industries Ltd. v. Sylvan Lake Golf & Tennis Club Ltd., 2002 SCC 19, [2002] 1 S.C.R. 678, at para. 31], “[t]he court’s task in a rectification case is…to restore the parties to their original bargain, not to rectify a belatedly recognized error of judgment by one party or the other.” [36] The majority in Fairmont used different terms to describe what must be found to have existed so that rectification can bring a formal document into conformity with it: the parties’ “true agreement” (para. 12); their “prior” or “antecedent” agreement (para. 14); and their “original bargain” (para. 13). These terms are variations on a theme and should be considered together. The search for something “prior”, “antecedent” or “original” connotes a search for something that existed in fact before the allegedly mistaken formal document; the terms “agreement”, “bargain” and “true” underscore that what existed must, like any agreement, be interpreted so as to derive what the parties actually agreed to—their “true agreement”.
[37] But what the majority in Fairmont made clear is that rectification cannot go beyond what the parties truly agreed to—the meaning properly given to their agreement—into the realm of what one or both parties may have intended as a result or was hoping to achieve, but that was never made part of the “true” agreement.
[38] This distinction is illustrated by the facts of Fairmont. In 2002 and 2003, Fairmont Hotels Inc. (“Fairmont”) and two of its subsidiaries had participated in a financing arrangement with a third party, involving reciprocal loans. Fairmont entered into those arrangements with the goal of ensuring foreign exchange tax neutrality. In 2006, a change in Fairmont’s ownership led to a modified plan which allowed Fairmont to fully hedge its exposure to foreign exchange tax, without addressing that of its subsidiaries. The “matter of similarly protecting the subsidiaries from exposure was deferred, without any specific plan as to how that might be achieved”: Fairmont, at para. 5.
[39] In 2007, overlooking the fact that nothing had been done to protect the subsidiaries from tax exposure, but wishing to terminate the reciprocal loan arrangements at the third party’s request, Fairmont redeemed its shares in the subsidiaries. This transaction resulted in a tax liability. Fairmont’s rectification request was to change the share redemption to a loan between Fairmont and the subsidiaries in order to avoid the tax liability: Fairmont, at paras. 6-7.
[40] This rectification request failed, however, because there was no variation between any prior agreement and the formal document sought to be rectified. The prior agreement only contemplated a redemption of shares, and moreover, fulfilled the contractual objective of terminating the reciprocal loan arrangements. The same was true of the formal document. The variation that occurred was between the tax effect Fairmont intended to accompany its contractual objective—tax neutrality—and the tax effect of the agreed upon share redemption—adverse taxes. This was insufficient to allow rectification because:[R]ectification corrects the recording in an instrument of an agreement (here, to redeem shares). Rectification does not operate simply because an agreement failed to achieve an intended effect (here, tax neutrality) — irrespective of whether the intention to achieve that effect was “common” and “continuing”…Rectification does not correct common mistakes in judgment that frustrate contracting parties’ aspirations or, as here, unspecified “plans”; it corrects common mistakes in instruments recording the terms by which parties, wisely or unwisely, agreed to pursue those aspirations: Fairmont, at paras. 30-31. ....
[75] As rectification is available to correct a document that does not record the parties’ true agreement, but is not available to fill in something that was never agreed to, the precise nature of the actual correction must be approached with caution. An applicant for rectification must show the precise form in which the written instrument can be made to express the prior agreement. As stated in Performance Industries Ltd. v. Sylvan Lake Golf & Tennis Club Ltd., 2002 SCC 19, [2002] 1 S.C.R. 678, at para. 40, “[t]his requirement closes the “floodgates” to those who would invite the court to speculate about the parties’ unexpressed intentions, or impose what in hindsight seems to be a sensible arrangement that the parties might have made but did not.” . McAfee v McAfee
With McAfee v McAfee (Ont CA, 2017) some lawyer (and I expect their insurer as well) breathed a sign of relief:[1] The appellant purported to accept portions of the respondent’s offer to settle, most if not all of which favored him, relying on the severability clause that had been put in the offer. In particular, he accepted the term providing that he did not have to pay arrears of child support or spousal support from the date of separation to date.
[2] He did not accept any other essential term of the offer in exchange to resolve the matter. Within hours of the purported acceptance, counsel for the respondent advised the appellant that the severability clause had been included in error and that his partial acceptance of the offer was rejected.
[3] The court has the jurisdiction to correct an inadvertent error in an offer to settle: Milos v. Zagas, 1998 CanLII 7119 (ON CA), [1998] 38 O.R. (3d) 218.
[4] We agree with the motion judge that the mistake made by the respondent’s counsel was obvious on the face of the offer and that the severability clause made no sense in the context of this offer. As the motion judge put it at para. 8 of his reasons:To allow the [appellant] to accept the clauses that financial benefit him and require the [respondent] to litigate all other clauses more than a year after the offer was submitted would be blatantly unfair. Canada (Attorney General) v. Fairmont Hotels Inc.
In Canada (Attorney General) v. Fairmont Hotels Inc. (SCC, 2016) the Supreme Court of Canada sets out basic principles applicable to rectifying (modifying and correcting) written contracts, including the role of mistake, in the context an effort to achieve a tax advantage:A. General Principles and Operation of Rectification
[12] If by mistake a legal instrument does not accord with the true agreement it was intended to record — because a term has been omitted, an unwanted term included, or a term incorrectly expresses the parties’ agreement — a court may exercise its equitable jurisdiction to rectify the instrument so as to make it accord with the parties’ true agreement. Alternatively put, rectification allows a court to achieve correspondence between the parties’ agreement and the substance of a legal instrument intended to record that agreement, when there is a discrepancy between the two. Its purpose is to give effect to the parties’ true intentions, rather than to an erroneous transcription of those true intentions (Swan and Adamski, at §8.229).
[13] Because rectification allows courts to rewrite what the parties had originally intended to be the final expression of their agreement, it is “a potent remedy” (Snell’s Equity (33rd ed. 2015), by J. McGhee, at pp. 417-18). It must, as this Court has repeatedly stated (Shafron v. KRG Insurance Brokers (Western) Inc., 2009 SCC 6 (CanLII), [2009] 1 S.C.R. 157, at para. 56, citing Performance Industries Ltd. v. Sylvan Lake Golf & Tennis Club Ltd., 2002 SCC 19 (CanLII), [2002] 1 S.C.R. 678, at para. 31), be used “with great caution”, since a “relaxed approach to rectification as a substitute for due diligence at the time a document is signed would undermine the confidence of the commercial world in written contracts”: Performance Industries, at para. 31. It bears reiterating that rectification is limited solely to cases where a written instrument has incorrectly recorded the parties’ antecedent agreement (Swan and Adamski, at §8.229). It is not concerned with mistakes merely in the making of that antecedent agreement: E. Peel, The Law of Contract (14th ed. 2015), at para. 8-059; Mackenzie v. Coulson (1869), L.R. 8 Eq. 368, at p. 375 (“Courts of Equity do not rectify contracts; they may and do rectify instruments”). In short, rectification is unavailable where the basis for seeking it is that one or both of the parties wish to amend not the instrument recording their agreement, but the agreement itself. More to the point of this appeal, and as this Court said in Performance Industries (at para. 31), “[t]he court’s task in a rectification case is . . . to restore the parties to their original bargain, not to rectify a belatedly recognized error of judgment by one party or the other”.
[14] Beyond these general guides, the nature of the mistake must be accounted for: Swan and Adamski, at §8.233. Two types of error may support a grant of rectification. The first arises when both parties subscribe to an instrument under a common mistake that it accurately records the terms of their antecedent agreement. In such a case, an order for rectification is predicated upon the applicant showing that the parties had reached a prior agreement whose terms are definite and ascertainable; that the agreement was still effective when the instrument was executed; that the instrument fails to record accurately that prior agreement; and that, if rectified as proposed, the instrument would carry out the agreement: Ship M. F. Whalen v. Pointe Anne Quarries Ltd. (1921), 1921 CanLII 57 (SCC), 63 S.C.R. 109, at p. 126; McInnes, at p. 820; Snell’s Equity, at p. 424; Hanbury and Martin Modern Equity (20th ed. 2015), by J. Glister and J. Lee, at pp. 848-49; Hart v. Boutilier (1916), 56 D.L.R. 620 (S.C.C.), at p. 622.
[15] In Performance Industries (at para. 31) and again in Shafron (at para. 53), this Court affirmed that rectification is also available where the claimed mistake is unilateral — either because the instrument formalizes a unilateral act (such as the creation of a trust), or where (as in Performance Industries and Shafron) the instrument was intended to record an agreement between parties, but one party says that the instrument does not accurately do so, while the other party says it does. In Performance Industries (at para. 31), “certain demanding preconditions” were added to rectify a putative unilateral mistake: specifically, that the party resisting rectification knew or ought to have known about the mistake; and that permitting that party to take advantage of the mistake would amount to “fraud or the equivalent of fraud” (para. 38).
B. Juliar
[16] As I have recounted, both courts below considered the Court of Appeal’s decision in Juliar, coupled with the chambers judge’s findings, to be dispositive. In my respectful view, however, Juliar is irreconcilable with this Court’s jurisprudence and with the narrowly confined circumstances to which this Court has restricted the availability of rectification.
[17] In Juliar, the parties had, by a written agreement and in the course of the restructuring of a family business, transferred shares to a corporation in exchange for promissory notes for an amount equal to what the parties believed to be the value of the shares. Upon discovering that the promissory notes were worth more than the shares’ value (resulting in the taxpaying party being assessed as having received a taxable deemed dividend), the parties sought rectification in order to convert what had originally been structured as a shares-for-promissory notes transfer into a shares-for-shares transfer (which would have been tax-deferred). For the Court of Appeal, and citing the decision of Re Slocock’s Will Trusts, [1979] 1 All E.R. 358 (Ch. D.), Austin J.A. held that the written agreement could be rectified as sought, citing the trial judge’s finding that the parties had “a common . . . continuing intention” to transfer shares in a way that would avoid immediate tax liability (para. 19). In order to achieve that objective, Austin J.A. said, the deal “had to be . . . a shares for shares transaction” (para. 25).
[18] This reasoning presents several difficulties. First, as many commentators have observed, it is indisputable that Juliar has relaxed the requirements for obtaining rectification, and correspondingly expanded the scope of cases in which rectification may be sought and granted beyond that which the governing principles allow (C. Brown and A. J. Cockfield, “Rectification of Tax Mistakes Versus Retroactive Tax Laws: Reconciling Competing Visions of the Rule of Law” (2013), 61 Can. Tax J. 563, at p. 571; N. Brooks and K. Brooks, “The Supreme Court’s 2013 Tax Cases: Side-Stepping the Interesting, Important and Difficult Issues” (2015), 68 S.C.L.R. (2d) 335, at p. 385; K. Janke-Curliss et al., “Rectification in Tax Law: An Overview of Current Cases”, in Tax Dispute Resolution, Compliance, and Administration in Canada (2013), 21:1, at pp. 21:8 and 21:9).
[19] I agree with this observation. As I have stressed, rectification is available not to cure a party’s error in judgment in entering into a particular agreement, but an error in the recording of that agreement in a legal instrument. Alternatively put, rectification aligns the instrument with what the parties agreed to do, and not what, with the benefit of hindsight, they should have agreed to do. The parties’ mistake in Juliar, however, was not in the recording of their intended agreement to transfer shares for a promissory note, but in selecting that mechanism instead of a shares-for-shares transfer. By granting the sought-after change of mechanism, the Court of Appeal in Juliar purported to “rectify” not merely the instrument recording the parties’ antecedent agreement, but that agreement itself where it failed to achieve the desired result or produced an unanticipated adverse consequence — that is, where it was the product of an error in judgment. As J. Berryman observed (in The Law of Equitable Remedies (2nd ed. 2013), at p. 510):In Juliar, the applicants had acted directly on the advice of their accountant. The accountant made a mistake as to the nature of the business ownership and the taxes that were paid prior to the arrangement he advised his clients to pursue. This is not a case for rectification. The clients intended to use the instrument given to them by their accountant. Their motive may have been to avoid tax but that is different from their intent which was to use the very form in front of them. [20] Secondly, even on its own terms, Juliar’s expansion of the availability of rectification cannot be justified. By way of explanation, in the case upon which Austin J.A. relied, Re Slocock’s Will Trusts, the plaintiff was the life beneficiary of her father’s residuary estate, with the capital and income after her death to be paid to her issue as she should appoint. She appointed her children to take after her death. Later, lands owned by her father’s family were sold to a development company, with the proceeds to be received and distributed by a management company in which the plaintiff received an allotment of shares, proportionate to her interest in the proceeds. After taking legal advice, the plaintiff and her children decided that she should surrender by deed her life interest in those proceeds as well as her shares in the management company (pp. 359-60). The deed, however, did not faithfully record the parties’ agreement, because it released only the plaintiff’s shares in the management company, and not her beneficial interest in the proceeds of sale (p. 360).
[21] While the outcome sought by the plaintiff and her children would have also secured a tax advantage for the children (specifically, avoidance of capital transfer tax upon the plaintiff’s death), Graham J. granted rectification not to secure that tax advantage, but on the strength of his finding (Re Slocock’s Will Trusts, at p. 361) that the deed as recorded omitted the proceeds of the sale of the lands, thereby failing to record fully the terms of the parties’ original agreement. This was, therefore, an unremarkable application of rectification to cure an omission in the instrument recording an antecedent agreement. Nothing in Re Slocock’s Will Trusts justifies Juliar’s modified threshold for granting rectification solely to avoid an unanticipated tax liability. Re Slocock’s Will Trusts simply confirmed that, provided that the underlying mechanism by which the parties had agreed to seek a particular tax outcome was omitted or incorrectly recorded, and provided that all other conditions for granting rectification are satisfied, a court retains discretion to grant rectification. The focus of the inquiry remained properly fixed on whether that originally intended mechanism was properly recorded, and not on whether it achieved the desired tax outcome or resulted in a party incurring an undesired or unexpected tax outcome.
[22] Subsequent English authorities confirm that Re Slocock’s Will Trusts created no distinct threshold for granting rectification in the tax context. In Racal Group Services Ltd. v. Ashmore (1995), 68 T.C. 86 (C.A.), the English Court of Appeal made clear that a mere intention to obtain a fiscal objective is insufficient to ground a claim in rectification: “. . . the court cannot rectify a document merely on the ground that it failed to achieve the grantor’s fiscal objective. The specific intention of the grantor as to how the objective was to be achieved must be shown if the court is to order rectification” (p. 106). Similarly, the court in Ashcroft v. Barnsdale, [2010] EWHC 1948, [2010] S.T.C. 2544 (Ch. D.), held that it could not rectify an instrument “merely because it fails to achieve the fiscal objectives of the parties to it”: para. 17 (emphasis in original). See also D. Hodge, Rectification: The Modern Law and Practice Governing Claims for Rectification for Mistake (2nd ed. 2016), at para. 4-145:A mere misapprehension as to the tax consequences of executing a particular document will not justify an order for its rectification. The specific intention of the parties (or the grantor or covenantor) as to how the objective was to be achieved must be shown if the court is to order rectification. [Emphasis deleted.] [23] Finally, Juliar does not account for this Court’s direction, in Shell Canada Ltd. v. Canada, 1999 CanLII 647 (SCC), [1999] 3 S.C.R. 622, at para. 45, that a taxpayer should expect to be taxed “based on what it actually did, not based on what it could have done”. While this statement in Shell Canada was applied to support the proposition that a taxpayer should not be denied a sought-after fiscal objective merely because others had not availed themselves of the same advantage, it cuts the other way, too: taxpayers should not be judicially accorded a benefit based solely on what they would have done had they known better.
[24] This point goes to the respondents’ submission that “[r]ectification is necessary to . . . avoid unjust enrichment of the Crown” (R.F., at para. 76), echoing the Court of Appeal’s concern in Juliar (at paras. 33-34, quoting Re Slocock’s Will Trusts, at p. 363) for the Crown’s “accidental and unexpected windfall” and the chambers judge’s concern in the present appeal (at para. 44) about the CRA’s “unintended gain” and (at para. 52) the Crown’s “tax windfall”. With respect, the premise underlying such concerns misses the point of the inquiry, inasmuch as it concerns the CRA. Tax consequences, including those which follow an assessment by the CRA, flow from freely chosen legal arrangements, not from the intended or unintended effects of those arrangements, whether upon the taxpayer or upon the public treasury. The proper inquiry is no more into the “windfall” for the public treasury when a taxpayer loses a benefit than it is into the “windfall” for the taxpayer when that taxpayer secures a benefit. The inquiry, rather, is into what the taxpayer agreed to do. Juliar erroneously departed from this principle, and in so doing allowed for impermissible retroactive tax planning: Harvest Operations Corp. v. Canada (Attorney General), 2015 ABQB 327 (CanLII), [2015] 6 C.T.C. 78, at para. 49.
C. Two Further Concerns
[25] Before applying the test for rectification — which test, I emphasize, is to be applied in a tax context just as it is in a non-tax context — to the facts of this appeal, I turn to two matters in need of clarification, the first of which was raised by the respondents.
(1) “Common Continuing Intention” to Avoid Tax Liability
[26] The respondents argue that, in the case of a common mistake, it is unnecessary for the party seeking rectification to prove a prior agreement concerning the term or terms for which rectification is sought. Rather, they say that evidence of a “common continuing intention” — in this case, their common continuing intention that the value of the shares in FHIW and FHIS should be transferred in a way that would avoid immediate tax liability — should suffice to ground a grant of rectification.
[27] This was, of course, the view of the Court of Appeal, both in Juliar and in the present appeal. The respondents also rely upon the decision of the English Court of Appeal in Joscelyne v. Nissen, [1970] 2 Q.B. 86, in which the court (at p. 95) approved of this statement of Simonds J. in Crane v. Hegeman-Harris Co., [1939] 1 All E.R. 662:. . . in order that this court may exercise its jurisdiction to rectify a written instrument, it is not necessary to find a concluded and binding contract between the parties antecedent to the agreement which it is sought to rectify. . . . [I]t is sufficient to find a common continuing intention in regard to a particular provision or aspect of the agreement. If one finds that, in regard to a particular point, the parties were in agreement up to the moment when they executed their formal instrument, and the formal instrument does not conform with that common agreement, then this court has jurisdiction to rectify, although it may be that there was, until the formal instrument was executed, no concluded and binding contract between the parties. [p. 664] [28] Joscelyne’s statement on the sufficiency of a common continuing intention has been adopted by the Ontario Court of Appeal in Wasauksing First Nation v. Wasausink Lands Inc. (2004), 2004 CanLII 15484 (ON CA), 184 O.A.C. 84, at para. 77, and the Newfoundland and Labrador Supreme Court in Dynamex Canada Inc. v. Miller (1998), 1998 CanLII 18094 (NL CA), 161 Nfld. & P.E.I.R. 97 (C.A.), at paras. 23 and 27. It is not immediately apparent, however, that it supports the respondents’ position here. Joscelyne’s reference to “a common continuing intention in regard to a particular provision or aspect of the agreement”, coupled with its reference to the later discovery that “the formal instrument does not conform with that common agreement”, strongly suggests that — howsoever often Joscelyne has been taken as suggesting otherwise by Canadian courts — it does not posit that, in the case of a common mistake, anything less than a prior agreement with respect to the term to be rectified is sufficient to support a grant of rectification. While Joscelyne allows for situations in which a contract will be unenforceable until a corresponding written instrument is executed (for example, in the case of a transfer of an interest in realty) and for situations in which there may not have been agreement on all essential terms before the written instrument was executed, this does not detract from its implicit affirmation that rectification requires the parties to show an antecedent agreement with respect to the term or terms for which rectification is sought.
[29] In any event, Joscelyne should not be taken as authorizing any departure from this Court’s direction that a party seeking to correct an erroneously drafted written instrument on the basis of a common mistake must first demonstrate its inconsistency with an antecedent agreement with respect to that term. In Shafron, this Court unambiguously rejected the sufficiency of showing mere intentions to ground a grant of rectification, insisting instead on erroneously recorded terms. As Denning L.J. said in Frederick E. Rose (London) Ld. v. William H. Pim Jnr. & Co., [1953] 2 Q.B. 450 (C.A.), at p. 461 (quoted in Shafron, at para. 52):Rectification is concerned with contracts and documents, not with intentions. In order to get rectification it is necessary to show that the parties were in complete agreement on the terms of their contract, but by an error wrote them down wrongly; and in this regard, in order to ascertain the terms of their contract, you do not look into the inner minds of the parties — into their intentions — any more than you do in the formation of any other contract. [30] This Court’s statement in Performance Industries (at para. 31) that “[r]ectification is predicated on the existence of a prior oral contract whose terms are definite and ascertainable” is to the same effect. The point, again, is that rectification corrects the recording in an instrument of an agreement (here, to redeem shares). Rectification does not operate simply because an agreement failed to achieve an intended effect (here, tax neutrality) — irrespective of whether the intention to achieve that effect was “common” and “continuing”.
[31] In this regard, my colleague Justice Abella relies upon the chambers judge’s finding that “when the 2006 transaction was undertaken, Fairmont had an intent that at some point in the future [it] would have to deal with the unhedged position of [FHIW and FHIS] in a way that would be tax and accounting neutral although [it] had no specific plan as to how [it] would do that” (para. 33, cited by Abella J. at para. 87). In my respectful view, however, it was an error for the chambers judge to ascribe any significance to that finding. Rectification does not correct common mistakes in judgment that frustrate contracting parties’ aspirations or, as here, unspecified “plans”; it corrects common mistakes in instruments recording the terms by which parties, wisely or unwisely, agreed to pursue those aspirations. While my colleague suggests that the jurisprudence of this Court undermines this reasoning (paras. 79-85), that very jurisprudence requires the party seeking rectification of an instrument to show not merely an inchoate or otherwise undeveloped “intent”, but rather the term of an antecedent agreement which was not correctly recorded therein: Performance Industries, at para. 37.
[32] It therefore falls to a party seeking rectification to show not only the putative error in the instrument, but also the way in which the instrument should be rectified in order to correctly record what the parties intended to do. “The court’s task in a rectification case is corrective, not speculative”: Performance Industries, at para. 31. Where, therefore, an instrument recording an agreed-upon course of action is sought to be rectified, the party seeking rectification must identify terms which were omitted or recorded incorrectly and which, correctly recorded, are sufficiently precise to constitute the terms of an enforceable agreement. The inclusion of imprecise terms in an instrument is, on its own, not enough to obtain rectification; absent evidence of what the parties had specifically agreed to do, rectification is not available. While imprecision may justify setting aside an instrument, it cannot invite courts to find an agreement where none is present. It was for this reason that the Court in Shafron declined to enforce the restrictive covenant covering the “Metropolitan City of Vancouver”. The term was imprecise, but there was “no indication that the parties agreed on something and then mistakenly included something else in the written contract”: Shafron, at para. 57.
[33] As is apparent from the reasons of my colleague Justice Wagner in Jean Coutu Group (PJC) Inc. v. Canada (Attorney General), 2016 SCC 55 (CanLII), on this question both equity and the civil law are ad idem, despite each legal system arriving at that same conclusion via different paths — the former being concerned with correcting the document, and the latter focusing on its interpretation. This convergence is undoubtedly desirable in the context of applying federal tax legislation. More particularly, the cautionary note struck by the Court in Quebec (Agence du revenu) v. Services Environnementaux AES inc., 2013 SCC 65 (CanLII), [2013] 3 S.C.R. 838, at para. 54, regarding “common intention” as a factor in rewriting parties’ agreements under art. 1425 of the Civil Code of Québec — which precaution is expressly relied upon by Wagner J. in Jean Coutu (at para. 21) — is equally apposite in applying the equitable doctrine of rectification:Taxpayers should not view this . . . as an invitation to engage in bold tax planning on the assumption that it will always be possible for them to redo their contracts retroactively should that planning fail. A taxpayer’s intention to reduce his or her tax liability would not on its own constitute the object of an obligation within the meaning of art. 1373 C.C.Q., since it would not be sufficiently determinate or determinable. Nor would it even constitute the object of a contract within the meaning of art. 1412 C.C.Q. Absent a more precise and more clearly defined object, no contract would be formed. In such a case, art. 1425 could not be relied on to justify seeking the common intention of the parties in order to give effect to that intention despite the words of the writings prepared to record it. (2) Standard of Proof
[34] The second point requiring clarification is the standard of proof. In Performance Industries, at para. 41, this Court held that a party seeking rectification will have to meet all elements of the test by “convincing proof”, which it described as “proof that may fall well short of the criminal standard, but which goes beyond the sort of proof that only reluctantly and with hesitation scrapes over the low end of the civil ‘more probable than not’ standard”. This, as was observed in Performance Industries, was a relaxation of the standard from the Court’s earlier jurisprudence, in which the criminal standard of proof was applied: see Ship M. F. Whalen, at p. 127, and Hart, at p. 630, per Duff J.
[35] In light, however, of this Court’s more recent statement in F.H. v. McDougall, 2008 SCC 53 (CanLII), [2008] 3 S.C.R. 41, at para. 40, that there is “only one civil standard of proof at common law and that is proof on a balance of probabilities”, the question obviously arises of whether the Court’s description in Performance Industries of the standard to which the elements of the test for obtaining rectification must be proven is still applicable.
[36] In my view, the applicable standard of proof to be applied to evidence adduced in support of a grant of rectification is that which McDougall identifies as the standard generally applicable to all civil cases: the balance of probabilities. But this merely addresses the standard, and not the quality of evidence by which that standard is to be discharged. As the Court also said in McDougall (at para. 46), “evidence must always be sufficiently clear, convincing and cogent”. A party seeking rectification faces a difficult task in meeting this standard, because the evidence must satisfy a court that the true substance of its unilateral intention or agreement with another party was not accurately recorded in the instrument to which it nonetheless subscribed. A court will typically require evidence exhibiting a high degree of clarity, persuasiveness and cogency before substituting the terms of a written instrument with those said to form the party’s true, if only orally expressed, intended course of action. This idea was helpfully encapsulated, in the context of an application for rectification of a common mistake, by Brightman L.J. in Thomas Bates and Son Ltd. v. Wyndman’s (Lingerie) Ltd., [1981] 1 W.L.R. 505 (C.A.), at p. 521:The standard of proof required in an action of rectification to establish the common intention of the parties is, in my view, the civil standard of balance of probability. But as the alleged common intention ex hypothesi contradicts the written instrument, convincing proof is required in order to counteract the cogent evidence of the parties’ intention displayed by the instrument itself. It is not, I think, the standard of proof which is high, so differing from the normal civil standard, but the evidential requirement needed to counteract the inherent probability that the written instrument truly represents the parties’ intention because it is a document signed by the parties. [37] In brief, while the standard of proof is the balance of probabilities, the essential concern of Performance Industries remains applicable, being (at para. 42) “to promote the utility of written agreements by closing the ‘floodgate’ against marginal cases that dilute what are rightly seen to be demanding preconditions to rectification”.
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