Written by David Gruber and Benjamin Reedijk
Written contracts are an essential tool in confirming the terms of an agreement between two parties following an apparently successful negotiation. Yet too often parties treat such agreements as mere formalities, signing them on the assumption that they reflect their understanding of the previously negotiated agreement. A recent decision of the B.C. Court of Appeal, 1001790 BC Ltd. v 0996530 BC Ltd., 2021 BCCA 321, highlights the perils of doing so.
The appellants, 0996530 BC Ltd. and Chia Hwei Lin (the Borrowers) were lent money by the respondent, 1001790 BC Ltd. (the Lender), with the loan secured by a mortgage over several properties. After the Borrowers failed to repay, the Lender commenced foreclosure proceedings.
Some of the mortgaged properties were sold, and the Borrowers repaid the Lender the $250,000 that both parties agreed was the outstanding principal on the loan. However, the Lender also stated that $325,721.50 in interest was owed, plus legal costs, and the Borrowers disagreed.
Eventually, representatives of the parties met directly, without counsel, to negotiate. The principal of the Lender offered to settle the matter for $325,721.50, and agreed to waive the legal costs. The general manager of the corporate borrower stated that he agreed, that the matter was "done, finished and settled.”
Unfortunately, and unbeknownst to the parties, they had not come to an agreement. The Lender understood that the matter had been settled for $325,721.50 in addition to the $250,000 that had already been paid (equivalent to the interest allegedly owed). The Borrowers gave evidence that they understood the $250,000 they had paid counted towards the $325,721.50. The Borrowers instructed their lawyer to prepare a written settlement agreement based on their understanding. That agreement (the Written Agreement) was emailed to the Lender's lawyer, who without reading it forwarded it to the Lender. A representative of the Lender stated that she saw that the Written Agreement referred to "$325,721.50," assumed that it reflected the additional money to be paid, and on that basis signed the Written Agreement, which was passed back to the Borrowers.
The Borrowers then sent the Lender a cheque for $75,721.50, at which point it became clear that the matter had not been resolved. The parties applied to the B.C. Supreme Court, with the Borrowers seeking to enforce the written agreement as written and the Lender seeking to have the agreement rectified to reflect its understanding of what it argued was an oral agreement that had already been reached.
The B.C. Supreme Court's Decision
The B.C. Supreme Court rejected both parties' positions. The Court found that, based on the evidence, the parties had never had a "meeting of the minds" in either the alleged oral agreement or the Written Agreement. Accordingly, there was no binding agreement at all— not the Lender's version nor the Borrowers'.
The Court of Appeal's Decision
The Borrowers appealed, and the Court of Appeal reversed the B.C. Supreme Court, finding that the Written Agreement must be enforced as it was.
The Court of Appeal addressed three principles of contract law that the Lender had relied upon to show that the agreement should not be enforced: the examination of the surrounding circumstances of the Written Agreement, and the concepts of non est factum (Latin for 'not my deed') and unilateral mistake.
The Surrounding Circumstances
The Court of Appeal began by reviewing when evidence of the surrounding circumstances of an agreement can influence the interpretation of a written agreement. It explained that the general rule with written agreements was that they are interpreted on an objective basis according to the terms of the written document, not the surrounding circumstances or the subjective views of the parties. Surrounding circumstances could be used to resolve ambiguities in the written document—but, as the Court of Appeal observed, "there was no ambiguity" in the terms of the Written Agreement. So here, even though the surrounding circumstances might have showed that the $353,721.50 figure reasonably suggested a deal to settle for payment of interest with a waiver of costs rather than an arbitrary settlement for $250,000 in principal plus 23.2% of the lender's interest entitlement, the surrounding circumstances could not be used to overcome the terms of the Written Agreement, as the B.C. Supreme Court had effectively done by finding there was no agreement.
Non Est Factum and Unilateral Mistake
Having found that the agreement was clear, the Court then considered whether the Lender could be relieved from its obligation given its misunderstanding as to the terms of the agreement under two closely related doctrines: non est factum and unilateral mistake.
Non est factum, the Court of Appeal observed, requires that three conditions be met: the document that was signed must be fundamentally different in nature from what the signing party believed it to be, the signature must be the result of a misrepresentation and the party signing the document must not be careless in doing so.
The Court of Appeal questioned whether the Written Agreement was "fundamentally different" from what the Lender thought it was signing, given that the Lender did understand that it was signing a settlement agreement. In any event, the Court rejected the argument that there had been any misrepresentation, because the terms of Written Agreement put forward by the Borrowers were very clear. As the Court of Appeal observed, if "those terms did not represent what the [L]ender understood was the agreement, it had only to refuse to sign." In any event, the Court noted, the Lender had been careless: it had signed the Written Agreement "without first taking the simple precaution of ascertaining its contents." This precluded the application of non est factum.
Finally, with respect unilateral mistake, the Court restated the requirement that rescission of a contract based on mutual mistake can be granted where "a party is found to have been mistaken as to a material term, and this error was actually or constructively known by the non-mistaken party, leading to an unconscionable result." The Court ruled that unilateral mistake was not available to the Lender because there was no evidence that the Borrowers knew or ought to have known that the Lender was mistaken. In any event, the fact that the Lender had not been diligent in reviewing the Written Agreement weighed against finding that the result was unconscionable.
The clear lesson from the decision is aptly stated in its very first sentence: "Parties to contracts should read those contracts before signing them." Parties must be cautious even if they think they already have reached an agreement. The decision illustrates that without this basic step, the law may well not come to a party's aid and relieve them of their obligations under the agreement they have signed. This is so even where that party establishes—as the Lender did here—that it really was mistaken about what it was agreeing to.