law of mistake (common, unilateral and mutual mistake)

Types of Mistake

The three types of mistake recognised by the law are:

• common mistake
• mutual mistake, and
• unilateral mistake.

Subject Matter of a Mistake

Only particular types of mistake are actionable by the law of mistake.

They include mistakes relating to:

• the facts which form the background to the contract: ie the factual basis upon which the contract was formed
• the terms of the written agreement
• the identity of one of the contracting parties 
• the law as the parties understood it as at the date of the contract, that is, a mistake of law.

Depending on the type of mistake, a contract may be:

• found to be void, and of no legal effect
• rectified to reflect the true agreement reached by the parties, but for the mistake.
  In turn, rectification may lead to recovery of money or property to which a party is entitled
  Rectification is remedy which is only available to written agreements. 

The mistake lies in the written agreement - it does not record the common intention of the parties.

 

1. Common Mistake

Along with a series of other requirements, the mistake must be fundamental to the contract. It's a shared mistake, by both parties.

It must be a fundamental assumption of a state of affairs - a belief that it exists or does not exist - and the mistake make performance of that fundamental obligation impossible.

The mistake must go to the essence of why the contract was made by the parties: Bell v Lever Bros (1932).  

The modern requirements for common mistake were confirmed by the Court of Appeal in Great Peace Shipping v Tsavliris (International) Ltd (2002). They are:

1. common intention: there must be a common assumption as to the existence of a state of affairs
2. allocated risk: there must be no warranty by either party that that state of affairs exists
3. state of affairs: the non-existence of the alleged state of affairs cannot be attributable to the fault of either party
4. impossibility: the non-existence of the state of affairs must render performance of the contract impossible
5. nature of state of affairs: the state of affairs may be the existence or a centrally important attribute of the consideration to be provided or circumstances which must subsist if performance of the contractual adventure is to be possible.

Common Intention 

Up to the time of agreeing the terms of the written contract, the parties must maintain a common intention. That common intention is not recorded in the written agreement.

The proof of the intention must be convincing to overcome the presumption that written contracts are a true and accurate record of what was agreed.  In mistake cases, that intention is not recorded in the written agreement and so it does not contain a true record of the agreement reached.

Allocated Risk

The law of mistake is about attributing risk in an agreement where it has not been recorded in written agreement. There can be no common mistake where the contract allocates the risk of the event which is said to be missing from the agreement by mistake. 

Where risk was allocated in the written version of the agreement, the doctrine of mistake has no scope to operate. The risk might be recorded in (the erroneous version of the contract) in the form of an express term, implied term, condition precedent, condition subsequent, provided it states who bears the risk of the relevant mistake.

 

Examples:

Mistake as to the existence of the subject matter

In Couturier v Hastie (1856), a buyer bought a cargo of corn which both parties believed to be at sea. Unknown to the parties at the time of the contract, the cargo had been disposed of. The cargo could not be purchased, because it did not exist

The court held that the contract was void because the subject matter of the contract had ceased to exist.

Mistake as to Title

In  contracts for sale of goods, the buyer already owns the property and neither party is aware of it. The contract will be void.

Mistake as to Quality

In Bell v Lever Bros it was said:

A contract may be void if the mistake is as to the existence of some quality which makes the thing without that quality essentially different from the thing it was believed to be

In Leaf v International Galleries (1950), both parties mistakenly believed that a painting was by the artist named Constable.  The court held that the contract was valid. The fact that it was not painted by a particular artist was a matter to a quality or characteristic of the painting: the parties agreed that a painting would be bought, and the painting was sold.

The fact that they thought it was by a particular artist (but it was not made by that particular artist) was nothing to the point.  

 

Mistake as to the possibility of performing the contract

Where the obligations under the contract are impossible to perform, the contract will be  void.

In Sheik Bros Ltd v Ochsner (1957), the land which was the subject matter if the contract was not capable of the growing the crops contracted for. The contract was held to be void.

 

2.   Mutual Mistake

In a mutual mistake, both parties operate under a misunderstanding as to each other’s intentions.

They are said to be at cross-purposes with one another.

The mutual mistake negates consent and therefore no agreement is said to have been formed at all.

Mutual mistake as to the identity of the subject matter

There is some ambiguity as to the understanding of the agreement.

To assess whether a mutual mistake has taken place, the court asks what one party thought it meant, as opposed to what the other party thought it meant.

The classic case is Raffles v Wichelhaus (1864). The defendant agreed to purchase Surat cotton to be delivered by the vessel named “Peerless”, which was due to arrive from Bombay. There were in fact two vessels fitting that description at the relevant time. The claimant was referring to one of the ships named Peerless; the defendant was referring to the other ship named Peerless. 

There was a latent ambiguity in the contract - the parties were actually referring to different ships. They were at cross-purposes with one another, and had not reached agreement at all.   

 

3.   Unilateral Mistake

Unilateral mistake addresses misunderstandings between the parties that relate to the terms of the contract or the identity of the parties to the contract. It does not apply to mistakes about the facts known or assumed by the parties.

In unilateral mistake cases, only one party is mistaken: the other party knows about it and takes advantage of the error. So, it's not a mistake made by both parties to a contract.

In Hartog v Colin and Shields (1939) the seller had made a mistake as to the price of goods. It was held that the buyer must have realised the mistake. The contract was held to be void.

Unilateral mistake does not apply in cases where the mistake relates to a quality of the subject matter of the contract (see above).  

 

Differences: Common Mistake and Unilateral Mistake

There are a series of differences between common mistake and other forms of mistake.

• In common mistake cases:
  • the terms of the contract are agreed, but
  • the parties enter a contract with:
    • the same misapprehension of fact or law,
    • which relates to the same subject matter
  • The mistake is common between the parties: they make the same mistake.
• unilateral mistake applies to cases where only one party is mistaken about:
  • the terms of the contract, or
  • the identity of the parties

Unilateral mistake does not cater for mistakes of fact. 

• Mutual Mistake applies to misunderstandings by both parties of:
  • the identity of the contracting parties, or
  • the terms of the contract 

Remedies 

The remedy for mistake include:

• rescission, to put the parties in their precontractual positions. This remedy is the one that renders the contract void
• rectification of the written agreement,  so that it reflects actual agreement reached by the parties.

Rescission and rectification may (or may not) be inconsistent with one another. Whether they are or not would depend upon the facts which are disputed between the parties and whether rectification of the written agreement to its true agreed form would result in a right to rescission, and whether the right to rescind was claimed at all as part of the case.

When contracts are rescinded or rectified, consequential further relief may be obtained, such as:

• to correct unjust enrichment of a party
• specific performance of the rectified contract

 

Rectification: Common Mistake

In order to obtain the remedy of rectification, the party alleging the mistake bears the burden of proof. The claimant must produce convincing proof that the mistake took place.

The claimant must show that either:

• the document fails to give effect to a prior concluded contract, or
• when they executed the document, the parties had a common intention in respect of a particular matter, which the contract does not record.
  

Both the mistake and the common intention continuing through to the formation of the written contract must be proven.

Damages may also be awarded as part of the remedy of rescission to restore the parties to the original positions before the contract as part of the remedy of rescission.