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A unilateral mistake or subjective misunderstanding of the contents, absent fraud or misrepresentation, should not be used to override an unambiguous written contract

British Columbia

,

Canada

In 1001790 BC Ltd. v. 099650 BC Ltd., 2021 BCCA 321, the respondent, 1001790 BC Ltd (the “lender”) lent money to the appellants, 0996530 BC Ltd and Chia Hwei Lin (the “borrowers”), secured by a mortgage.   By August 2016, the borrowers had made a number of lump-sum payments on the mortgage, leaving an undisputed balance to be paid on the principal of $250,000. The lender foreclosed on the mortgage.

By December 2017, the borrowers paid the outstanding payment of $250,000. What remained in dispute between the parties was the amount of interest owing and how the interest should be calculated.

The parties negotiated a settlement of the lender’s claim. The parties agreed that the total settlement amount would be $325,171. However, the parties had a different understanding as to what that sum covered. The borrowers believed that the specified sum included the previous payment of $250,000 that covered the outstanding principal owing. While the lender believed that the borrowers had agreed to pay $325,171, in addition to the $250,000 already paid.

The borrowers’ lawyer drafted a document entitled “Mutual Release and Settlement Agreement” (the “written agreement”), based on the borrowers’ understanding of the oral agreement, and sent it to the lender’s lawyer. Neither the lender, the lender’s daughter, nor the lender’s lawyer, read the written agreement before signing it.

On March 1, 2019, the borrowers’ solicitor delivered a trust cheque to the lender’s solicitor, purporting to be full payment, in the amount of $75,721.50.  The lender’s solicitor objected.  Each party brought an application, with the borrowers seeking to have the agreement enforced and the petition for foreclosure dismissed.  The lender sought rectification.

The Chamber Judge's Decision

The Chambers Judge found that there was no meeting of the minds between the parties. The Chambers Judge dismissed both applications, finding that neither rectification nor enforcement of the written agreement was appropriate. The Chambers Judge concluded that there was no enforceable bargain made.

The British Columbia Court of Appeal’s Decision

Grauer J.A. held that where an oral agreement had been wholly reduced to writing, as in this case, that outward expression is the contract itself, not the subjective views of the parties (para 41). What either party subjectively understood or misunderstood is irrelevant in the absence of fraud or misrepresentation (para 42). Where there is some ambiguity in the terms, the court may have regard to the surrounding circumstances, but these must never be allowed to overwhelm the words of the agreement (para 42).

In this case, however, the written agreement purported to record the terms of an agreement reached by the parties to settle the lender’s claim against the borrowers.  Those terms required no interpretation, as the meaning of the words was not disputed.  They were unambiguous (para 34).

Grauer J.A. held that the chambers judge erred in using what she termed surrounding circumstances not to aid in interpretation, but to contradict the words of the written agreement altogether (para 43).  The parol evidence rule precluded the chambers judge from doing precisely that: having regard to evidence outside the words of the written contract that would add to, subtract from, vary, or contradict a contract that has been wholly reduced to writing (para 44).

Therefore, Grauer J.A. concluded that, at common law, the written agreement was binding on the lender, notwithstanding that she and her advisors did not read it and subjectively misunderstood its contents (para 45).

Grauer J.A. then considered whether there were any equitable considerations that would enable the court not to enforce such a contract against the mistaken party. The common thread of the equitable considerations was unconscionability.

The lender established no reason in equity or law not to enforce otherwise binding contract.
  1. Non est factum – to succeed on a plea of non est factum, the party must demonstrate that: (a) the document they signed was fundamentally different in nature from what they believed it to be; (b) that they signed it as a result of a misrepresentation; and (c) they were not careless in doing so (para 49). Although the document was fundamentally different in nature from what the lender believed it to be, the lender did not establish that they signed the written agreement on the basis of misrepresentation or mutual mistake (paras 54-55). Particularly missing from the circumstances which may have contributed to the lender’s carelessness was any finding of fault on the part of the borrowers.  The parties chose to negotiate without involving their solicitors, and the written agreement that the borrowers proffered was clear and unambiguous.  The lender then took the intended and deliberate step of signing the document without first taking the simple precaution of ascertaining its contents.  In these circumstances, the lender established no reason in equity or law not to enforce the contract they signed (para 60).
  2. Unilateral mistake – a court can order the rescission of an otherwise binding contract where it would be unconscionable to enforce the bargain.  This will be the case 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.  Once again, lack of due diligence by the mistaken party in failing to read the document may weigh against unconscionability (para 50). Rescission on the basis of unilateral mistake was not available as there was no evidence that the borrowers knew or ought to have known that the lender was mistaken in any way. In these circumstances, given the lender’s lack of due diligence, unconscionability did not arise (para 51).
April 14, 2022
– 1001790 BC Ltd. v. 099650 BC Ltd., 2021 BCCA 321