MTECC NEWS 22.05 ||| Commerciality and rectification – Victorian Supreme Court rectifies contract to avoid commercial absurdity in Melbourne Property Group Investments (MPGI) Pty Ltd as trustee for the MPGI Trust v. Knight 43 Martin Street Pty Ltd  VSC 41
Successful rectification claims include those where the proposed rectification aligns with the commercial reality of the transaction and contemporaneous written records of associated negotiations.
The plaintiff (“MPGI”) and the defendant (“Knight 43”) were involved in the development of two luxury apartments. MPGI was an investment vehicle established by Mr Pelchen. Knight 43’s sole director and secretary was Mr Kavallero. He and MPGI owned 70% and 30% respectively of Knight 43. Knight 43 obtained bank finance but needed further funds for the development. By a loan agreement between MPGI and Knight 43 dated April 2017, MPGI loaned approximately $3 million to Knight 43.
Following delays and cost increases, a variation deed was executed in October 2018. Parties to the variation deed included MPGI, Knight 43, Mr Kavallero and Mr Pelchen. Clause 8.1 of the variation deed provided that Mr Kavallero guarantees to the Borrower (i.e., Knight 43) the payment of certain amounts in accordance with the loan agreement and variation deed.
MPGI asserted clause 8.1 was the result of a drafting error. It sought rectification of the provision. It submitted that at the time the variation deed was executed, the parties’ common intention was that the guarantee would be in favour of MPGI as the Lender, not in favour of Knight 43 as the Borrower.
Knight 43 opposed rectification on grounds including:
- there was no common intention or mistake;
- clause 8.1 was not absurd – Mr Kavallero’s evidence at trial was that the purpose of the guarantee was to ensure Knight 43 would fulfill its loan repayment commitments; and
- the principle that contracts of guarantee are to be interpreted strictly in the surety’s favour (Ankar Pty Ltd v. National Westminster Finance (Australia) Ltd (1987) 162 CLR 549).
The Court ordered the guarantee be rectified for reasons including the following:
- the fact that an instrument is a guarantee is no impediment to rectification – the principles of rectification apply to guarantees, e.g., Simic v. New South Wales Land and Housing Corporation (2016) 260 CLR 85 where the High Court rectified two bank undertakings;
- the clause 8.1 guarantee is commercially sensible only if given in favour of MPGI as this aligned with the parties’ obligations, including Knight 43’s obligation to repay its loans;
- other variation deed provisions that indicated the clause 8.1 guarantee was intended to be given in favour of MPGI, e.g., Recital D referred to Mr Kavallero’s agreement “to guarantee certain payments to the Lender”;
- the contemporaneous email correspondence between the solicitors acting for MPGI and Knight 43 during the negotiation of the variation deed demonstrated a common intention that the guarantee would be given by Mr Kavallero in favour of MPGI, e.g., MPGI’s solicitor emailed Knight 43’s solicitor in October 2018 stating “our client is not prepared to proceed unless some guarantee is provided that the Knight group will service 100% of loan costs…”; and
- Mr Kavallero’s evidence regarding the purpose of the guarantee was not credible as it was inconsistent with the emails passing between the parties’ solicitors which the Court described as providing the best record of the variation deed negotiations.