Rectification Is Not Equity's Version Of A 'Mulligan' – Words To Heed After Fairmont And Coutu

Introduction

In Canada's common law jurisdiction, rectification has historically been a powerful equitable remedy which, if granted, enables applicants to "travel back through time" to correct the documentary basis of transactions that have resulted in unintended detrimental tax or other consequences. Thus, the doctrine has a retroactive effect, permitting the unwinding of a transaction, and subsequently, the reversal of such unintended consequences.

Rectification has posed as a useful tool to the taxpayer or legal practitioner who was not paying attention or perhaps didn't "know the rules;" in other words, who closed their eyes, swung their club and struck a ball directly into the water. It represents a do-over, or in the recent words of Justice Russell Brown of the Supreme Court of Canada ("SCC"), and for those golfing enthusiasts who resort to such measures, a "mulligan."1

Jurisprudential History - Juliar and Other Matters

Common Law Jurisdictions

Historically, the application of the equitable doctrine of rectification has largely been restricted to circumstances in which the documentary record of a transaction contained errors, which in turn, produced a negative result. Lord Justice Denning, in Frederick E Rose (London) Ltd v William H Pim Jnr & Co Ltd, described the remedy, stating:

[r]ectification 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.2

In somewhat recent years, and pursuant to the Ontario Court of Appeal ("OCA") decision, Juliar v. Canada (Attorney General)3 in 2000 ("Juliar"), the scope of the doctrine was expanded by Justice Cameron, though tentatively. Unable to demonstrate an error in the respective written agreement or transactional documents, the applicant in Juliar was nonetheless granted the remedy, having cited a common intention to conduct the given transaction in such a fashion as to defer tax liability; an intention which had not been satisfied.

Although perhaps unintended by the court, Juliar presented advisors working in tax planning with an oversight mechanism; it rewarded carelessness and it legalized retroactive tax planning. Despite the attempts of the Canada Revenue Agency ("CRA") to appeal the decision, the SCC denied leave to appeal.

In 2002, Performance Industries Ltd. v. Sylvan Lake Golf & Tennis Club Ltd.,4 was handed down from the SCC. The SCC re-established the parameters of the doctrine, stating 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," and "[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."5 Thus, it appeared as though order had been restored to the doctrine as applicants would have to prove that an actual agreement contemplated had not been carried out as planned; however, Juliar continued as "good" law.

Civil Law

In Quebec's civil law system, the doctrine of judicial correction acts similarly to that of rectification. Conversely, it is founded in legislation; located in Article 1425 of the Civil Code of Québec ("CCQ"). Historically, judicial correction has been limited to the correction of clerical errors, but recently it too has been broadened to include the correction of errors of substance, where the common intention of the parties to a given transaction has been thwarted.

In 2013, the SCC delivered its decision in Quebec (Agence du revenu) v. Services Environnementaux AES inc.6 ("AES"), a matter which had been heard together with Agence du Revenu du Quebec v. Jean Riopel.7...