Mistake

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When a party enters a contract under a false assumption, its agreement to the contract is said to be impaired by a mistake. The term mistake usually refers to those assumptions which were self induced or spontaneous, rather than those caused by a misrepresentation or misleading or deceptive conduct. The law of mistake is extremely complex - we offer both a detailed explanation (below), as well as a short outline with the basic principles and tests for mistakes (see Mistake (Outline)):

This article is a topic within the subject Contracts.

Contents

Required Reading

Paterson, Robertson & Duke, Contract: Cases and Materials (Lawbook Co, 11th ed, 2009), pp. 759-774 [31.05-31.65]; 778 -802 [33.85-33.195].

Introduction

[1] The common law barely ever recognises a mistake - this is both because it interferes with with commercial activity, and because the only possible remedy the common law could allow is to declare the contract void ab initio. This would mean that the contract would have never existed, and that would entail very drastic consequences, especially if the contract has already commenced and if third parties acquired rights.

On the other hand, equity is more ready to award relief for mistake. This is because equity is able to declare the contract voidable, which means it may be rescinded on terms which aim at achieving fairness between the parties. Equity also has the power to make orders such as refusing to grant specific performance, or full specific performance, of a contract

Since both common law and equity are now administrative in the same court, the court usually determines first whether the contract is void in common law, and if not whether it is voidable in equity.

Mistake theories

[2] There are two theories regarding mistakes in the common law:

  • Constructionalist theory
  • Civilian theories

The courts use elements from both theories to determine a case.

Constructionalist theory

[3] Under this theory, a mistake is solved through construction rather than an independent doctrine of mistake. For example, if A promised B to sell him an object which no longer exists, the court determines, through construction of the contract, whether:

  • A has promised that object exists, and therefore is in breach.
  • B has promised to pay even if the object doesn't exist, and therefore can't recover his money
  • There was a condition precedent that the object exists and the contract, and therefore the contract never existed.

Civilian theory

[4] Under the civilian theory, a fundamental error in the contract would destroy the 'agreement' or 'consensus' part of it and therefore the contract would have never existed. The question arises what constitutes a 'fundamental error'. In broad terms, the error must be the main substance of the contract rather than a collateral matter. For example:[5]

  • Identity of a person, as opposed to attributes
  • Substance or existence of the subject matter, rather than quality of it.
  • Nature of the transaction, as opposed to its terms.

Categories of mistakes

[6] There are three types of mistakes:

  • Parties in agreement
    • Common mistakes. This is where both parties erroneously assume the same thing.
  • Parties not in agreement
    • Mutual mistakes - this is where both parties assume different things.
    • Unilateral mistakes - this is where both parties assume different things, but one party is 'right' (according to an objective interpretation).

Note that a mistake is mistake of fact. False assumptions as to future happenings are the subject of frustration and not mistake.

Parties in agreement - common mistakes

[7] In the case of a common mistake, the parties are both in (erroneous) agreement as to a certain fact. This fact can be:

  • The existence of the subject matter of the contract.
  • The quality of the subject matter of the contract.
  • The recording of their intentions.

Existence of subject matter

A common mistake as to the existence of subject matter was discussed in McRae v Commonwealth Disposals Commission:

  • Uses the constructional approach.
  • In a case where both parties had equal knowledge as to the existence of the subject matter, and it turned out to be false, then it would justify the implication of a condition precedent. In that case, the contract would be void for the failure of the condition precedent, and parties would be restored to their original position.
  • However, in a case where only one party has the knowledge, and the other simply relies on what the first party tells it, than there could be no condition precedent. The first party promises or guarantees the existence of the subject matter and will be in breach if it does not exist.

Quality of subject matter

On the other hand, Bell v Lever Brothers is concerned with the quality of subject matter. It demonstrates the differences between the two theoretical approaches.

  • When there is a mistake as to the quality of the subject matter, it only negates consent in circumstance which mean that it is fundamentally or essentially different from what was contracted for.[8]
  • From a constructionalist point of view, there is no reason to imply a condition precedent. Condition precedents are only implied if they are necessary because the new state of facts makes the contract different in kind from what it was going to be.
    • For implying a condition precedent, the question is "Does the state of the new facts destroy the identity of the subject matter as it was in the original state of facts?"[9]

The next case, Solle v Butcher, demonstrates the difference between the common law and equity.

  • There is no such thing as 'mistake' in common law. A contract is void only if there was a breach of a condition precedent.
  • However, even if a contract is not void in common law, it may be voidable in equity.
  • Equity may declare a contract as voidable for mistakes if it is unfair that the other party retains its advantage.
  • A contract will also be voidable from fundamental common mistake where the party isn't actually at fault.

In Australia, Solle v Butcher was affirmed in Svanosi v McNamara[10]:

  • Facts: land sold with a hotel on it. Later found out that hotel was only partially on the land.
  • Reaffirmed Solle v Butcher, also said "it is difficult to conceive any circumstance in which equity could properly give relief by setting aside the contract unless there has been fraud".[11]
    • Later in Taylor v Johnson, the court gave 'fraud' a wide equitable definition to include unconscionable dealing.[12]

However, in Great Peace Shipping v Tsavliris Salvage (International) it was decided that the decision in Solle v Butcher is no longer good authority:

  • However, if a contract is not void in common law, it cannot be voidable in equity because of a common mistake (direct opposition to Solle v Butcher).
    • "there is no jurisdiction to grant rescission of a contract on the ground of common mistake where that contract is valid and enforceable on ordinary principles of contract law."[13]
  • The test remains whether the mistake was so great that the contract is essentially a different thing from what it was believed to be. If yes, it is void.

Whilst this case is from England, these two statements were confirmed in Australia Estates Pty Ltd v Cairns City Council.[14]

Recording the agreement

[15] The courts have an equitable power to rectify a written contract where the parties failed to accurately record their common intention. This was discussed in Maralinga v Major Enterprises:

  • The courts will only rectify a contract where "the writing by common mistake fails to express that agreement accurately...there has been a firm insistence on the requirement that the mistake as to the writing must be common to the parties and not merely unilateral."[16]

The issue was also discussed in Pukallus v Cameron:

  • Rectification can occur where:
    1. There is "an intention common to both parties at the time of contract to include in their bargain a term which by mutual mistake is omitted therefrom."[17]
    2. The plaintiff advances "'convincing proof' that the written contract does not embody the final intention of the parties. The omitted ingredient must be capable of such proof in clear and precise terms"[18]

Parties not in agreement

[19] There are also cases where the parties are individually mistaken about aspects of the contracts so that it could not be said that they are in agreement. A party may mistaken with regards to:

  • Terms of the contract.
  • Identity of the other party.
  • The nature of a document it is signing.
  • The recording of the agreement.

Mistake as to terms

Sometimes, a party is under a mistaken belief as to a fundamental term of the contract, such as price or condition of the subject matter. This was discussed in Smith v Hughes, which never yielded a proper result (a new trial was ordered). It was also discussed in Taylor v Johnson:

  • A party who entered a contract upon a unilateral mistake will only be entitled to rescission in equity (declaration that the contract is voidable) if the other party had acted in an unconscionable way.
    • For example, if the other party was aware of the mistake, and sought to profit out of it.
  • Quotation: "a party who has entered into a written contract under a serious mistake about its contents in relation to a fundamental term will be entitled in equity to an order rescinding the contract if the other party is aware that circumstances exist which indicate that the first party is entering the contract under some serious mistake or misapprehension about either the content or subject matter of that term and deliberately sets out to ensure that the first party does not become aware of the existence of his mistake or misapprehension."[20]

Mistake as to identity

[21] A party may be mistaken as to the identity of the other party. In the simple sense, the law follows the law of unilateral mistake mentioned above:

  • A party can will only be entitled to rescission if the unilateral mistake was due to the unconscionable conduct of the other party.

However, problems arise if third-parties become involved.

Parties not face to face

[22] These situations occur when parties communicate over the telephone, internet, e-mail etc and one party thinks the other is someone else. This was discussed in Cundy v Lindsay[23]:

  • Facts: Lindsay was selling goods to a person named Blenkarn who was impersonating a well known firm named Blenkiron. Blenkarn then sold the goods to a third-party Cundy.
  • Held: the title did not pass to Cundy. Lindsay had never met Blenkarn; they knew nothing of him. They were not ad idem. The property remained the property of Lindsay.

Another example is King’s Norton Metal Co Ltd v Edridge Merrett & Co[24]:

  • Facts: plaintiff sold goods to a person (Wallis) who was impersonating a made up company (Hallam & Co). He then sold them to the defendant (a third-party) and never paid the plaintiff back.
  • Held: The plaintiffs intended to contract with the writer of the letters. The contract was made, and title passed to the writer: Wallis. He then transferred it to the Defendant. The contract is valid.

The two cases seem to have similar facts but produce contrasting results. It is suggested that if "Hallam & Co" existed as a real company, the title would not pass, as in Cundy v Lindsay. the importance of the distinction is also demonstrated in Shogun Finance Ltd v Hudson[25]:

  • Facts: A Rogue was buying a car off Shogun using someone else's driving license (Mr. Patel). He then sold the car to Hudson and disappeared. Shogun sought to recover the value of the car from Hudson.
  • Held: Shogun intended to contract with the real Mr. Patel. Mr. Patel did not consent to the contract. No contract can arise between Shogun and Mr. Patel.
  • Similarly, there was no consensus ad idem between the rogue and Shogun, since Shogun never meant to contract with him. No contract can arise between them.
  • Thus, there was no contract. Hudson did not obtain title to the car.

Parties face to face

There are different rules when the parties are face to face. This was discussed in Lewis v Averay:

  • The difference with face to face mistakes is that even if you're wrong to the actual identity, you are still contracting with this person standing in front of you, so you can't say you were contracting with someone else and therefore there was no consensus.
    • "When a dealing is had between a seller like Mr. Lewis and a person who is actually there present before him, then the presumption in law is that there is a contract, even though there is a fraudulent impersonation by the buyer representing himself as a different man than he is. There is a contract and with the very person there, who is present in person, liable no doubt to be avoided for fraud, but still a good contract under which title can pass unless and until it is avoided."[26]
  • In addition, a contract is only voidable and not void. However, once a third party acquires rights, there is a bar to rescission.
    • "the fact that one party is mistaken as to the identity of the other does not mean that there is no contract, or that the contract is a nullity and void from the beginning. It only means that the contract is voidable, that is, liable to be set aside at the instance of the mistaken person, so long as he does so before third parties have in good faith acquired rights under it."[27]

Mistakenly signed documents

[28] The court may set aside a contract which was signed under the belief that it was a fundamentally different document to what is actually is. Since this is in contrast to the usual rule of the legal effect of a signature, it has a narrow application. The requirements are:[29]

  1. The document must have been read without carelessness; and
  2. The document was thought to be a fundamentally different document to what it is.

The people who usually manage to rely on this mistake are blind or illiterate people.[30] A lower standard is required when no third-parties are affected. This was discussed in Petelin v Cullen:

  • "The insistence that such precautions should be taken as a condition of making out the defence is of fundamental importance when the defence is asserted against an innocent person, whether a third party to the transaction or not, who relies on the document and the signature which it bears and who is unaware of the circumstances in which it came to be executed."[31]
  • "It is otherwise when the defence is asserted against the other party to the transaction who is aware of the circumstances in which it came to be executed and who knows (because the document was signed on his representation) or has reason to suspect that it was executed under some misapprehension as to its character. In such a case the law must give effect to the policy which requires that a person should not be held to a bargain to which he has not brought a consenting mind for there is no conflicting or countervailing consideration to be accommodated - no innocent person has placed reliance on the signature without reason to doubt its validity." [32]

Mistake in Recording Agreement

[33] Rectification of a contract after a unilateral mistake is only available if:[34]

  1. A signs a document under misapprehension, and
  2. B knows of the misapprehension and its cause (a mistake on A’s part), and
  3. B lets A remain under misapprehension where B should let A know.

In such a case, B will be precluded from relying on A’s execution to resist A’s claim for rectification to give effect to A’s intention.

References

Casebook refers to Paterson, Robertson & Duke, Contract: Cases and Materials (Lawbook Co, 11th ed, 2009).

Textbook refers to Paterson, Robertson & Duke, Principles of Contract Law (Lawbook Co, 3rd ed, 2009).

ACL refers to the Australian Consumer Law.

  1. Casebook, pp. 759-60 [31.05-31.15]
  2. Textbook, p. 451 [31.20]
  3. Textbook, p. 451 [31.25]
  4. Textbook, pp. 451-2 [31.30]
  5. Psaltis v Schultz (1948) 76 CLR 547, 561
  6. Casebook, pp. 760-1 [31.20]
  7. Casebook, p. 761 [33.25]
  8. [1932] AC 161, 217
  9. [1932] AC 161, 227
  10. (1956) 96 CLR 186
  11. (1956) 96 CLR 156, 195-6
  12. (1983) 151 CLR 422, 431
  13. [2003] QB 679, 725
  14. [2005] QCA 328, [64]
  15. Casebook, p. 785 [31.110]
  16. (1973) 128 CLR 336, 350
  17. (1982) 180 CLR 447, 452
  18. (1982) 180 CLR 447, 452
  19. Casebook, p. 790 [31.130]
  20. (1983) 151 CLR 422, 432
  21. Casebook, pp. 795-6 [31.155]
  22. Casebook, pp. 796-7 [31.160]
  23. (1878) 3 App Cas 459
  24. (1897) 14 TLR 98
  25. [2004] AC 919
  26. [1972] 1 QB 198, 207
  27. [1972] 1 QB 198, 207
  28. Casebook, p. 799 [31.185]
  29. Petelin v Cullen (1975) 132 CLR 355, 359-60
  30. (1975) 132 CLR 355, 359-60
  31. (1975) 132 CLR 355, 360
  32. (1975) 132 CLR 355, 360
  33. Casebook, p. 802 [31.195]
  34. Leibler v Air New Zealand Ltd (No. 2) [1999] 1 VR 1, 14. Reaffirming the English Court of Appeal's decision in Thomas Bates & Son Ltd v Wyndham’s (Lingerie) Ltd [1981] 1 WLR 505
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