Even when all the formal elements of a contract have been complied with, the law acknowledges human foibles which cause us to make mistakes, act unethically towards one another or unfairly use an advantage or knowledge against another. Therefore, rules have been formulated to counteract the effect of these human failings. Factors which will impair the legal validity of contracts include:
- undue influence
Although these factors will often overlap, they will be dealt with in separate articles. This article deals with the difficult doctrine of mistake.
What happens if the parties make a mistake in their contract?
Throughout life mistakes are often made and parties entering into contracts are no exception. It can be disastrous if you realise the terms of the contract are not what you thought you agreed to. There could be a misunderstanding between the parties as to what particular item they’re contracting for, both could believe something exists which does not or one party could misinterpret another’s offer. When a contract is otherwise valid but there has been some mistake, one party may try to rescind (take back) or void the contract due to the mistake. However, very few types of mistakes will allow you to get out of a contract.
The doctrine of mistake in its barest form generally involves a mistake not intentionally induced by either party. The mistake made must be one of fact and not of law. For example, the law will not help you if you are mistaken as to the rights a certain type of contract will give you, but may assist if you were mistaken as to the subject matter of the contract.
In addition, it must be a fundamental mistake. A minor mistake which doesn’t affect the basis of the contract will not be grounds for rescission of the contract.
The types of mistake that can be made are:
- common mistake
- mutual mistake
- unilateral mistake
Common mistake occurs when both parties are mistaken as to the same fact. However, the situations in which such a contract will be rescinded or voidable on the basis of common mistake are limited and its occurrence is rare.
An example of a common mistake is when the subject matter on which the contract is based ceases to exist. For example if you make a contract for sale of goods without either party realising the goods have perished, the parties can usually get out of the contract.
However, a fundamental mistake can be hard to establish. For example, if a painting sold is a forgery, this is not a fundamental mistake as the basis of the contract was the sale of the painting, not its authenticity.
Mutual mistake occurs where both parties make different mistakes, such as having different understandings as to what the agreement means. Where there has been mutual mistake, the contract will be objectively interpreted, disregarding what the parties subjectively intended. If a clear meaning or intention can be ascertained, the contract will be valid. The fact one party misunderstood the agreement is irrelevant, provided the other party did not intentionally mislead or encourage the mistake during negotiations. Only if the contract is too uncertain will it be voidable.
Unilateral mistake occurs when only one party is mistaken. The party could be mistaken, for example as to the identity of the parties, the terms of the contract or even the quality of the subject matter. The mistaken party will only be granted any type of relief if they can demonstrate that the other party had knowledge of the mistake, reasons for suspecting the mistake or contributed to that mistake.
For example, if A shakes hands with B thinking they are contracting with B when actually the contract is with C this may be a unilateral mistake capable of rescission if B is aware of and encourages A’s misapprehension.
On the other hand, a party buys a vintage car assuming that it still functions, even though in reality it is for display purposes only. Unless the seller is aware of or encourages that misapprehension, there is no basis to avoid the contract when the buyer realises they were mistaken as to the quality of the car. The warning ‘buyer beware’ applies in these situations.
The doctrine of mistake is incredibly complex and difficult to apply. In order to avoid these situations, it is always important to be vigilant in contract negotiations, to ensure you are on the same page as your counterpart and the contract reflects your understanding of the agreement. You are generally better off getting a lawyer to assist in any significant contract negotiations to ensure you are getting what you agreed to.
If you require any assistance with contracts, please do not hesitate to contact us.