contracts W7 textbook - mistakes
Overview
Mistake occurs when a party discovers they entered a contract under a mistake after formation.
Mistakes can be self-induced or spontaneous, not just induced by misrepresentation.
Distinctions:
Common mistake: Both parties share the same mistake.
Mutual mistake: Parties misunderstand each other.
Unilateral mistake: Only one party is mistaken.
Mistakes can relate to:
Terms of the contract
Identity of the other party (always unilateral)
Existence or quality of the subject matter
Example of mistake as to terms: Clerical error specifies 100 rental instead of 1000. Common if unnoticed, unilateral if tenant silent.
Mistake as to existence: Sale of painting unknowingly destroyed by fire.
Mistake as to quality: Item believed to be an antique is an imitation.
A mistake can render a contract:
Void: No valid contract ever formed.
Voidable: Valid contract, but can be set aside.
Rectifiable: Court corrects an error in the document.
How Does the Law Respond to Mistakes?
Three approaches:
Constructionist: Applying contract law rules.
Civilian: Distinct doctrine of mistake.
Unconscionability: Applying equitable principles.
Common Law
Constructionist approach: Solves mistakes by applying rules of contract formation and construction.
Offer and acceptance, certainty, express and implied terms determine who bears the risk.
May result in:
No contract formed.
Parties released due to failure of a contingent condition.
Mistakes about identity are resolved by construing offer and acceptance.
Mistakes about existence are resolved by construing the contract:
Seller promised existence (seller liable).
Purchaser took the risk (purchaser liable).
Implied condition precedent (no contract).
If the parties' agreement can't be objectively determined, it is an issue of certainty.
McRae v Commonwealth Disposals Commission is a case resolved on a constructionist basis.
Hartog v Colin & Shields is an example of a unilateral mistake case resolved on formation principles.
Civilian approach: A fundamental error destroys consent and consensus ad idem, rendering the contract void.
It is necessary to identify the substance of the contract, determining whether the mistake relates to that substance or a collateral matter.
Bell v Lever Brothers Ltd is an example.
Equity
If common law binds a mistaken party or doesn't void the contract, equity may provide remedies.
Equity can set aside or rectify contracts to ensure enforcement of common law rights is not unconscionable.
Remedies and Consequences
A void contract can cause inconvenience if performance has begun or been completed.
Third-party interests may be adversely affected.
If A sells goods to B under a mistake, and B sells to C, C does not gain title if the contract between A and B is void. (nemo dat quod non habet - one cannot give what one does not have).
C may lose money and be liable to A in conversion.
These consequences explain the narrow scope for voiding contracts for common mistake at common law.
Contracts may be rescinded in equity if valid at common law but entered under mistake, making them voidable.
Title can pass under a voidable contract until it is rescinded.
Rescission is not available if parties cannot be restored to their original positions or if third-party rights have intervened.
Equity can refuse specific performance or grant it on terms.
Rescission may be granted for common and unilateral mistakes.
A mistaken party may prefer rectification (correction) over release from the contract.
Rectification is available in equity for mistakenly recorded agreements.
Rescission sets aside the contract; rectification corrects it to reflect the actual agreement.
Rectification might justify a less demanding test than rescission.
Common Mistake
Parties reach agreement but share a false assumption.
Two approaches at common law:
Construing the contract to determine the risk of the mistake.
Recognizing the contract may be void for common mistake (extremely limited).
The High Court prefers construing the contract.
Rescission in equity for common mistake is controversial.
Rectification can be granted if requirements are met.
Legislation may govern the effect of the mistake (e.g., Sale of Goods legislation).
Construing the Contract
Three possible findings:
Parties at cross-purposes: No contract due to lack of certainty.
Implied condition: Parties relieved if facts are not as understood.
Unconditional promises: Binding irrespective of the mistake.
Mistakes resulting in absurdity or inconsistency may be resolved through construction if obvious and correctable.
The Promise Is Unconditional
McRae v Commonwealth Disposals Commission: Promises were unconditional despite the common mistake.
Commission invited tenders for a wrecked oil tanker at a location, accepted McRae's tender, but there was no tanker.
McRae sued for breach of contract and the High Court deemed the Commission liable.
Couturier v Hastie: The High Court said the case was decided on the basis of construction. The buyer was only liable to pay if the goods were in existence and capable of delivery at the time the contract was made; the question of whether the contract was void did not arise.
Implied Condition
In cases where the subject matter doesn't exist, ask whether the contract was subject to an implied condition.
If so, parties are released from obligation.
This includes circumstances where the non-existence of the subject matter fundamentally alters the agreement's nature, such as when the intended object is destroyed or unavailable without the parties' knowledge.
In such situations, the parties may be able to argue that the contract is void due to the lack of consideration or a fundamental breach, thus relieving them of any further obligations under the agreement.
It is crucial to evaluate the specific terms and intentions of the parties involved, as well as any relevant statutory provisions that may apply in the jurisdiction concerning the non-existence of the subject matter.
Relief Based on Interpretation
Where a mistake results in absurdity or inconsistency, the issue may be resolved at common law by a process of construction.
Fitzgerald v Masters: An error in a clause was corrected by reading "inconsistent" as "consistent".
Contracts Void for Mistake at Common Law
Civilian theory: Contract should be void due to common mistake.
Bell v Lever Brothers Ltd: Contract may be void in limited circumstances.
Bell was paid compensation to terminate his service, but it was discovered that he had committed breaches of duty that would have justified his dismissal without any compensation. The House of Lords held that the compensation agreement was not void, as it related to a quality of the subject matter that was not fundamental.
Lord Atkin: Mistake must be as to the existence of some quality which makes the thing without the quality essentially different from the thing as it was believed to be.
Lord Atkin mentioned basic examples
The contract released is the same, in both case and the party paying for the released gets exactly what he bargains for.
Minority view:
The mistake was as fundamental to the bargain as any error one can imagine.
A mistake as to quality will almost never be regarded as sufficient to render a contract void at common law.
Solle v Butcher: The English Court of Appeal concluded that the common law did not provide relief for common mistake.
Great Peace Shipping Ltd v Tsavliris Salvage (International) Ltd (The Great Peace):
Rejected Denning LJ’s interpretation of Bell v Lever Bros. and confirmed the existence of a common law jurisdiction as found in Bell v Lever Bros.
Analogous to the doctrine of frustration.
Elements of common mistake
Must be a common assumption
The contract will be void due to common mistake if the following elements are present:
there must be a common assumption as to the existence of a state of affairs;
there must be no warranty by either party that that state of affairs exists;
the nonexistence of the state of affairs must not be attributable to the fault of either party;
the non-existence of the state of affairs must render performance of the contract impossible;
the state of affairs may be the existence, or a vital attribute, of the consideration to be provided or circumstances which must subsist if performance of the contractual adventure is to be possible.
In Australia, The High Court displayed a preference for resolving issues of mistake on a constructionist basis by focusing on an interpretation of what the promisor can really be understood to have promised.
HWG Holdings Pty Ltd v Fairlie Court Pty Ltd understood the principle identified in Bell v Lever Brothers to form part of Australian law and found a contract to be void at common law for common mistake. the buy-back agreement void because the parties had made a “very serious mistake” about the tax consequences which constituted the entire purpose of the agreement.
Rescission in Equity
Issue: Is a contract voidable in equity if not void at common law for common mistake?
Conflicting views in Australian courts.
Solle v Butcher: flat alterations, rent mix-up. The English Court of Appeal held by a majority, that the lease was voidable on terms laid down by the Court.
Denning LJ found that the contract was not void ab initio at common law, even though he considered the mistake to be fundamental.said that a contract could be set aside in equity
Svanosio v McNamara: Dixon CJ and Fullagar J observed that “it is difficult to conceive any circumstance in which equity could properly give relief by setting aside the contract unless there has been fraud or misrepresentation or a condition can be found expressed or implied in the contract.”
Taylor v Johnson: majority of the High Court approved the decision in Solle v Butcher, justifying it as an instance in which the Court intervenes to prevent unconscionable conduct.
Great Peace Shipping Ltd v Tsavliris Salvage (International) Ltd (The Great Peace):
The Court of Appeal also held that there was no equitable jurisdiction to set contracts aside for common mistake.
Australia Estates Pty Ltd v Cairns City Council, two members of the Queensland Court of Appeal expressed their approval of The Great Peace and maintained that in Australian law there is no equitable jurisdiction to set aside, on the ground of common mistake, an agreement which is valid and enforceable at common law.
Rees v Rees, McMillan J declined to follow what was said in Australia Estates Pty Ltd v Cairns City Council and granted rescission of a settlement deed on the basis of a common mistake.
Rectification for Common Mistake
Equity may rectify contractual documents to reflect the parties’ true intentions.
It is unconscientious for a party to apply a contract inconsistently with the known common intention.
Parties orally agree to sale, written contract mistakenly includes all furniture (including the carpets and curtains).
Parol evidence rule may apply at common law.
Entire agreement clauses do not preclude rectification.
Rectification is retrospective to the document's execution date.
The party seeking rectification must provide “clear and convincing proof” of the common intention.
Unilateral Mistake
Occurs when only one party to a contract is mistaken as to the terms or subject matter.
More difficult to establish grounds for relief than with common mistake, due to the principle of caveat emptor (buyer beware).
Key Considerations:
Knowledge of the Mistake: Did one party know or should they have known that the other party was operating under a mistake?
Effect of the Mistake: Does the mistake relate to a fundamental aspect of the contract?
Scenarios and Examples
Mistake as to Terms: One party misunderstands a critical term of the contract, and the other party is aware of this misunderstanding.
Example: In Hartog v Colin & Shields, the seller mistakenly offered skins at a price per pound instead of per piece, resulting in a much lower price. The buyer was aware of the real market price and tried to take advantage of the mistake. The court held that the contract was void because the buyer must have realized the seller's error.
Mistake as to Identity: One party contracts with someone believing them to be someone else.
Example: A person pretends to be a wealthy individual to purchase goods on credit. This is often linked to issues of fraud.
Mistake in Recording Agreements: An agreement is correctly reached, but there is an error when documenting it.
Legal Principles and Remedies
Void vs. Voidable Contracts: A contract affected by unilateral mistake may be deemed void or voidable depending on the specifics.
Void: The contract is invalid from the beginning, usually if the mistake is fundamental and known to the other party.
Voidable: The contract is valid until the mistaken party takes action to void it.
Equity and Unconscionability: Equity may intervene if enforcing the contract would be unconscionable. The court will consider whether the non-mistaken party acted in good faith.
Rectification: If a written contract does not accurately reflect the parties' agreement due to a unilateral mistake, the court might order rectification to correct the document.
Key Cases and Australian Perspective
Taylor v Johnson (1983) 151 CLR 422: A significant Australian case where Johnson mistakenly believed she was selling land for 15,00015,000 per acre instead of the agreed total of 15,00015,000. Taylor knew of the mistake but did not inform Johnson. The High Court held that the contract should be set aside because Taylor acted unconscionably.
The court emphasized that if one party is aware that the other is mistaken about a fundamental term and deliberately does not correct the error, equity will intervene.
Conditions for Relief
For a unilateral mistake to provide grounds for relief, typically the following conditions must be met:
Serious Mistake: The mistake must be about a fundamental aspect of the contract.
Knowledge: The other party must be aware of the mistake or have reason to believe it exists.
Unconscionability: It would be unfair or unconscionable to enforce the contract in light of the mistake.
Conclusion
Unilateral mistake claims are heavily fact-dependent, requiring a careful examination of what each party knew and did. Courts are more inclined to offer relief if one party actively
Mutual Mistake
Definition: Mutual mistake occurs when both parties to a contract are mistaken about a fundamental aspect of the agreement, but their mistakes are different, leading to a lack of consensus ad idem (meeting of the minds).
Key Characteristics:
Misunderstanding: Each party operates under a different misunderstanding.
No Consensus: There is no true agreement because the parties are at cross-purposes.
Ambiguity: Often arises from ambiguous terms or descriptions in the contract.
Legal Consequences:
Void Contract: A contract based on mutual mistake is often considered void because there was no genuine agreement.
No Binding Obligation: Neither party is bound by the agreement.
Requirements for Establishing Mutual Mistake:
Mistake of Fact: The mistake must be about a fact, not an opinion or prediction.
Fundamental Mistake: The mistake must go to the root of the contract, affecting its very nature.
Different Understandings: Each party must have had a different understanding of the terms.
Reasonable Basis: Each party's misunderstanding must be reasonable.
Examples:
Peerless Case: The classic example is the case of the ship Peerless, where the buyer and seller both had a ship named Peerless in mind, but each was referring to a different ship. The court held that there was no binding contract.
Ambiguous Description: If a contract describes property in vague terms and each party reasonably interprets it differently, a mutual mistake may exist.
Resolution:
Objective Test: Courts often apply an objective test to determine if a reasonable person would conclude that a contract existed, despite the mistake.
Parol Evidence: Courts may consider extrinsic evidence to understand the parties' intentions.
Comparison with Other Types of Mistake:
Common Mistake: In common mistake, both parties make the same mistake about a fundamental fact.
Unilateral Mistake: In unilateral mistake, only one party is mistaken, and the other party is aware or should be aware of the mistake.
Mistake as to Identity
Occurs when one party contracts with another, believing them to be someone else. This type of mistake is always unilateral, as only one party is mistaken about the identity of the other party.
Key Aspects:
Nature of the Mistake: The mistake must be about the identity of the person, not merely their attributes (e.g., creditworthiness). A mistake about someone's attributes is a misrepresentation, not a mistake as to identity.
Fundamental Importance: The identity of the party must be of fundamental importance to the contract. This means that the mistaken party would not have entered into the contract with the actual person.
Examples:
Face-to-Face Transactions: It is difficult to void a contract for mistake as to identity in face-to-face transactions. The law presumes that the mistaken party intended to deal with the person physically present, regardless of their claimed identity.
Written Contracts: Mistake as to identity is more readily recognized when the contract is made in writing, and the mistaken party relied on a written representation of identity.
Legal Principles:
Void vs. Voidable: If a mistake as to identity is established, the contract may be considered void ab initio (from the beginning), meaning no contract ever existed. This is because there was no true agreement or consensus ad idem.
Third-Party Rights: If the goods have been sold to a bona fide third party, the original owner may not be able to recover them because the contract with the fraudster is voidable rather than void.
Key Cases:
Cundy v Lindsay (1878) 3 App Cas 459: A fraudulent individual named Blenkarn ordered goods from Lindsay & Co., signing his name to resemble 'Blenkiron & Co.,' a reputable firm. Lindsay & Co. sent the goods to Blenkarn, believing they were dealing with Blenkiron & Co. Blenkarn then sold the goods to Cundy. The House of Lords held that the contract between Lindsay & Co. and Blenkarn was void for mistake as to identity, and therefore, Cundy had no title to the goods and was liable to Lindsay & Co. in conversion.
Ingram v Little [1961] 1 QB 31: Two elderly sisters sold their car to a rogue who pretended to be a reputable businessman named 'Hutchinson.' They initially refused to accept his check but relented after he provided a business address. The check bounced, and the rogue sold the car to Little. The Court of Appeal held that the contract was void for mistake as to identity because the sisters intended to deal only with the 'reputable Hutchinson' and not the rogue.
Phillips v Brooks [1919] 2 KB 243: A rogue purchased a ring from a jeweler, falsely representing himself as 'Sir George Bullough.' He wrote a check and persuaded the jeweler to allow him to take the ring immediately by referencing Bullough’s address. The check bounced, and the rogue pawned the ring with Brooks. The court held that the contract was not void for mistake because the jeweler intended to contract with the person physically present, regardless of his false identity. The contract was voidable for fraud, but since Brooks acquired the ring in good faith before the contract was rescinded, he obtained good title.
Conditions for Relief:
To establish a mistake as to identity and obtain relief, the mistaken party must prove:
An intention to deal with the specific person is crucial, revealing that the identity of the contracting party was material to the agreement. Additionally, it must be shown that the mistaken identity played a significant role in the decision-making process, which influenced the terms of the agreement.
Mistakes in Electronic Transactions
Unique Challenges: Electronic transactions introduce unique challenges regarding mistakes due to the speed, anonymity, and complexity of online interactions.
Types of Mistakes:
Input Errors: Mistakes made while entering data (e.g., incorrect price, quantity).
Misdirected Emails: Sending an offer or acceptance to the wrong email address.
Website Errors: Glitches or inaccuracies on e-commerce websites.
Legal Framework:
General Principles Apply: The general principles of mistake in contract law also apply to electronic transactions.
Electronic Transactions Act: Relevant legislation governing electronic transactions may provide additional rules or clarifications.
Key Considerations:
Awareness of Mistake: Whether the other party knew or should have known about the mistake.
Opportunity to Correct: Whether the mistaken party had an opportunity to review and correct the error.
Terms and Conditions: The terms and conditions of the website or platform may allocate the risk of mistakes.
Examples and Cases:
Clickwrap Agreements: Courts often enforce clickwrap agreements, even if the user did not read the terms, unless there is evidence of fraud or unconscionability. Unintended Errors: In situations where an error occurs due to a drafting mistake, courts may look for intent and fairness rather than strictly adhering to the letter of the agreement.