A brother borrowed $16M from a bank to buy his sister’s half share of their inherited property, secured against the property. The brother started to develop the property and then entered into a join venture with a developer to obtain further funding. The question was whether the brother was to repay the debt to the bank, or whether it would repaid from funds borrowed by the joint venture. The joint venture agreement supported the former conclusion but the negotiations had been otherwise.
The law is that a commercial contract is determined by what a reasonable businessperson would have understood its terms to mean. Prior negotiations are inadmissible to aid construction of a contract because these are superseded by the contract itself.
The court noted that the agreement provided that the brother would repay the pre-existing debt, not the joint venture, and found in these terms. This was supported by the fact there were other terms in the written agreement which were inconsistent with the joint venture repaying the debt.
The law of rectification based on mutual mistake requires convincing proof that the parties’ common intention was not reflected in the contract. The court found this claim failed because there was never a common intention to start with. The court refused to permit the brother to amend his claim to one for rectification based upon a unilateral mistake induced by the developer because it suffered from the same flaw – the brother never believed that the developer would assume half the debt for a reduction in their payment by the full amount of the debt, so any mistake was not one induced by the developer.
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