#7427 - Mistake - Contract Law

Week 9- Mistake

Mistake:

• Mutual mistake hardly ever happens. Both parties make the mistake or one makes it is more common. A common mistake generally has no effect on the contract- it doesn’t make it a nullity and does not allow the contract to be rescinded in equity.

• In Oscar Chess and Williams there was a mutual mistake. Each intended to make a contract and had the same understanding about the contract. It is still possible to perform what their conduct shows they wanted to do.

• It is a nullity only when unbeknown to both parties when the contract is made it is already impossible for one or more sides to perform their main promise.

• When the contract has been formed one of the parties may discover that they entered the contract by mistake. This may relate to the existence of significant facts. If the truth was known they would not have entered the contract. The contract may become impaired or vitiated by the mistake.

• It was not full consent. Because they were ill informed. Who should bear the risk of this?

• Errors that the mistaken party may believe include:

  • The document signed was a contract of guarantee when it was actually a contract of sale.

  • The vase was really an imitation.

  • The other party was not really credit worthy.

  • Confused with who the other party in the contract is.

  • Contract emitted an important term.

  • Payment per week was payment per month.

Law and equity:

• The contract allocates the risks so avoiding contractual obligations cannot occur because of a mistake. Caveat emptor (buyer beware) or caveat venditor (seller beware) apply.

• The contract should stand for commercial viability.

• If the consequence was drastic and a mistake is recognized the contract was void abinitio (from the beginning). There was never a valid contract. This is bad if performance has begun. They have to repay money that they have spent and third parties will be adversely affected and this may make one of the parties liable to A for conversion (a tort) for having exercised dominion over A’s goods even though unwittingly.

• Equity treats the contract as voidable and not void when there is a mistake. It may or may not be set aside. If they rescind it will be done fairly and it is more flexible than the all or nothing approach in the common law. A will be more likely to lose it all in equity because recession is not available if the parties cannot be restored to their position.

Mistake theory approaches:

• Constructionist theory:

  • Solves mistake problems by using the contract law rules like formation of a contract and construction. Determine what the parties agreed to find which party assumed the risk.

• Civilian theory:

  • A fundamental error destroys the consent and consensus ad idem which are essential to a contract. You find the substance of the contract to find out what is fundamental.

Two categories of case:

• When the parties agree but assume by mistake some matter to be true. Mutual mistake.

• Parties are not in agreement because they intended the contract to have different terms and purposes. They are unilateral mistakes if understanding of one of the parties accords with what a reasonable person would think was intended from the contract.

Mistake and frustration:

• When the contract mistake is about subsequent events the question is whether it is frustrated.

• Whether it is frustration or mistake, there is always the initial question about whether the contract covers the situation. If there is then the parties have allocated the risk.

Approaching a mistake problem:

• Was there a contract?

• Has one of the parties expressly or impliedly undertaken the risk of the mistake?

• What kind of mistake? A common mistake or a mutual mistake (where they are at cross purposes) of unilateral (cross purposes but one party is right).

• Was the mistake fundamental?

• What relief is available?

Parties in agreement:

• Parties make the same false assumption.

• If it is a mistake as to the existence of the subject matter: use a constructionist approach and look for implied terms and interpret the contract about who had the risk. A civilian approach to decide if the contract was void for mistake and whether it was fundamental.

  • Statute such as the sales of goods act say that if the goods have perished without the seller knowing then the contract is void. But damages in torts are available.

• Mistake as to title. For example if a person enters into a contract to purchase a property which they already own. This is void for common mistake or an implied condition precedent or a total failure of consideration.

• Mistake as to quality of subject matter. Likely to be voidable in equity.

• Equity follows the law when the subject matter does not exist. But it grants relief when the quality is bad.

Mistake in recording the agreement:

• When they reduce their agreement to writing they can fail to accurately record their common intention. The parol evidence rule may apply and prevent them adding their real intentions. Yet equity will find it unconscionable for them to rely on their strict legal rights in a situation. Equity may order rectification of the document so it records their true intentions even if it says this is the entire agreement.

Parties not in agreement:

• There was no consensus ad idem and were unaware of each others intentions. The mistakes were mutual. Yet if one person is right it is unilateral.

• Mistake as to the terms:

  • Mutual. Resolved by construction. Did B appear to accept the offer? If yes then there is a valid contract despite B’s mistake.

  • Unilateral. When one party knows that the other is under a mistaken impression as to the terms then they are misleading them. Is it unconscionable for the non mistaken party to take advantage of the mistake? This refers to deliberate concealment.

  • A mistake as to the value of the subject matter known to the other party has no vitiating effect. The contract stands and it will not be set aside because of a mistaken value (different for price). The mistaken party should not be encouraged to be careless.

• Mistake as to identity:

  • Hard to say the contract is void. It is a one way voidness. If B deceived A then it would be a unilateral mistake or voidable by fraudulent misrepresentation. A can enforce the contract against B but B cannot. You could argue there is not agreement or that the contract is void. The case law in this area is in two categories:

    • Parties not face to face.

      • When a party pretends to be someone else through correspondence.

    • Parties are face to face.

      • One party has assumed a false name. It will be presumed that the mistaken party is contracting with the person present.

• Mistakenly signed document:

  • Non est factum means it is not their deed.

  • If you believe the document to be fundamentally different from what it was and signed without carelessness then you are not bound. There is an absence of consent. It is the same if the signature is fraudulent or the deed is incorrectly read to an illiterate person or is blind or a migrant or a mental person. They must take reasonable precautions to understand the document.

• Dispute with an innocent party:

  • When a person signs a document and it was obtained fraudulently by misrepresentation. They won’t be held to the signature.

• Dispute with a guilty party:

  • The person who induced the signing and was aware of the mistake. If you make a misrepresentation then the contract is void and it is a unilateral mistake.

• Mistake in recording the agreement:

  • Rectification clears common mistake and is also granted in unilateral mistake.

2 big divisions of mistake:

1. Parties make same mistakes (no legal effect)– called a common mistake NOT mutual mistake even tho some judges say that. So in mcrae and bell the judges say mutual but mean common mistake

o Common mistake has no effect on the k, doesn’t make the K an anullity. No opportunity to rescind

o When can it make an agreement void/devoid of legal effect:

§ Only if there was a common mistake which causes an impossibility to perform the K,

§ it nullifies the intention to contract.

§ If 1 side is in a better position to know the true facts and has negligently allowed the other to share the common mistake, the agreement will not be an anullity, the K is not void but he is liable in breach of an implied warranty

§ If agreemt is an anulilty. The legal rationale is….-?

§ When will common mistake have a legal effect? Answer: Is it a situation when at time of agreement was it already impossible to perform? If it is, and neither is in fault in respect to the mistake, then K is: annullity

o In Oscar chess v Williams, both thought the car was 1948, they wouldn’t have made the transaction if they knew real age of car. But the agreement didn’t make K anullity. Why ? coz the essentials of K are there and they had intention to contract, and possible to perform what they promised to do and so the mistake has no effect.

2. Where parties don’t make the same mistake

McRae v Clth Disposals Commission - Contract will be void ab initio if the subject matter of the contract ceased to exist at the time it was entered

· mcRae about the effect of common mistake as to whether the tanker existed

· Cth invited tendors for the purchase of an oil tanker

· Parties were both mistaken to the existence of the tanker

· M sued for loss sustained in outing the expedition

· Cth defended K was entered into as a result of common mistake

· Common Mistake as to quality of subject matter

· There is a distinction between

· Failure to answer to the contract description is a mere breach of contract

· Where the thing delivered is of a...