XCB v Creative Brands [2005] VSC 424

What the court decided

By an agreement entered into on 25 November 2004 the plaintiffs sold a cosmetics distribution business to the defendant, Creative Brands [1]. Creative Brands denied liability for sums the plaintiffs claimed under the agreement and, by counterclaim, alleged that it was entitled to rectification [2], [3]. On 2 September 2005 his Honour ordered under Rule 47.04 that the rectification claim be heard and determined separately and in advance [3]. Creative Brands contended that clause 16, which made it liable for returns, discounts, credits and rebates, should have been limited to promotional stock [4]. On the last day of the hearing it abandoned common mistake, leaving a claim based on its own mistake of which the plaintiffs were said to be aware [4].

Both counsel adopted, with one difference, Kenny JA's statement of principles in Leibler v Air New Zealand Limited (No 2) [5]. Among further principles his Honour drew from Kenny JA's judgment, a mistake about what the terms would mean in effect or in money, as opposed to what they said, will not support rectification [7]. His Honour found it unnecessary to resolve whether something less than actual knowledge of the mistake may suffice, as the majority of the High Court suggested in Taylor v Johnson [8].

Counsel for Creative Brands submitted that the other party's knowledge of the mistake and a failure to correct it were, without more, sufficient [9]. Whelan J rejected that reading of Leibler, stating that something more than mere knowledge and a failure to correct is required [10]. He said that knowledge and a failure to correct will not suffice unless the circumstances are "special" and render it unconscionable for the non-mistaken party to rely on the terms [10].

The plaintiffs' solicitor, Mr Moshinsky, returned to the parties' meeting with a new draft of the clause that was not confined to promotional stock [12], [36]. A second redraft expressly included basic stock, deleted stock, retail stands and other goods [42]. Mr Mason, who substantially conducted the commercial negotiations for the buyer, had ticked four of its five sub-clauses [12], [44]. He conceded that he did so to indicate his approval, and one of the ticked sub-clauses was clause 16.2 [44]. He accepted that he saw other stock was included but thought it would have no financial effect [48]. His Honour found that Mr Mason read each redraft and the final clause, and rejected his claim that he still believed clause 16 was confined to promotional stock [52]. He found it more likely that the buyer's solicitor followed his normal practice and acted on his instructions [52]. Mr Mason's mistake was not about what the clause provided but about its likely financial consequences [52]. These conclusions were fatal to the claim because there was no relevant mistake at all [53].

In the alternative, his Honour would not have found that any of the sellers' representatives knew of the alleged mistake or, if less than actual knowledge suffices, were aware of circumstances indicating it [65]. During final submissions Creative Brands obtained leave to amend so that clause 16 would be confined to promotional stock and the earlier provisions about other returns reintroduced [67]. His Honour accepted that difficulty in formulating the rectification would not of itself justify refusing relief [68]. But he saw the problem that the amended relief addressed as yet another sign of fundamental deficiencies in the claim [68]. His Honour concluded that the rectification claim must fail and said he would hear the parties on orders, costs and further directions for the other issues [69].

Why it matters

Rectification for unilateral mistake requires a mistake about what the document contains, known to the other party in circumstances that make reliance on it unconscionable; it does not rescue a party who read and approved a clause but misjudged its cost [6], [7], [10]. Whelan J also said, though it was not necessary for the result, that the other side's knowledge and silence will not be enough without special circumstances making reliance on the document unconscionable [10], [53]. The decision was given by a single judge on a separate trial of the rectification counterclaim, before the other issues between the parties were determined [3].

Numbers in square brackets are paragraph numbers of the judgment. This note summarises a decided case for education and is not legal advice. See how the notes are written.