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Digest of the Week – Rectification of Contractual Agreement

Digest of the Week – Rectification of Contractual Agreement

Rectification is limited to cases where the agreement between the parties was not correctly recorded.



Canada (Attorney General) v. Fairmont Hotels Inc.
2016 CarswellOnt 19252
Supreme Court of Canada


Contracts --- Rectification or reformation — General principles

Business entered into reciprocal loan transaction with real estate investment trust, and money was routed through related corporation — Potential foreign exchange tax issue was made neutral by establishing two subsidiaries to business — Because of sale of business, possibility existed that foreign exchange gain or loss would be realized in connection with reciprocal loan arrangements — Reciprocal loan agreements were unwound with regard to certain hotels, and subsidiaries cashed preferential shares by mistake, which triggered unintended taxable foreign exchange gains — Chambers judge granted business' application to rectify plan documents — Judge found that purpose of unwind of loans was to unwind loans on tax-free basis, and redemption of preference shares was mistakenly chosen as means to do so — Court of Appeal dismissed Attorney General of Canada's appeal — Court held that business had specific and unwavering intention that transactions would be tax neutral and that no redemptions of relevant preferential shares should occur, but redemptions was authorized by mistake — Attorney General of Canada appealed — Appeal allowed — Rectification was limited to cases where agreement between parties was not correctly recorded in instrument that became final expression of their agreement — Party seeking rectification must show not only putative error in instrument, but also way in which instrument should be rectified in order to correctly record what parties intended to do — Business was not entitled to rectification as it could not show having reached prior agreement with definite and ascertainable terms — Parties' intention of tax neutrality could not support grant of rectification.
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