Contract formation has always been an integral part of our business lives. A contract gives a legal effect to the business obligations of the people, which they are bound to perform. However, a party to the contract can waive its contractual obligations if the contract is held to be void or voidable on grounds of mistake, representation, coercion, undue influence, etc. In this article we shall discuss the doctrine of mistake in the common law jurisdiction. A contractual mistake is when either or both parties enter into a contract on the basis of a mistake of fact essential to the contract, which if they had known, they would not have entered the contract otherwise.
Table of Contents
Elements of Mistake
A few of the necessary elements of a contractual agreement is that there must be agreement between the party’s ad idem, i.e., meeting the parties’ minds. The terms of the contract must be agreed to by them. The doctrine of mistake deals with a situation where the parties lack consensus ad idem, either by virtue of a common mistake (mistake on part of all the parties) or a unilateral mistake (mistake on part of either party). In the leading case of Smith v. Hughes, Blackburn, J. observed that, “if one the parties intends to make a contract on one set of terms, and the other intends to make a contract on another set of terms, or, as it is sometimes expressed, if the parties are not ad idem, there is no contract, unless the circumstances are such as to preclude one of the parties from denying that he has agreed to the terms of the other”. [1]
As a matter of law, a contract formed on the premise of common mistake is void, while a contract based on a unilateral mistake of a party has no reliefs unless certain special circumstances are proved by the party alleging it. Further, mistake must be of fact and not law. It takes into consideration a mistake in the facts of the case in which the contract is made only when the mistake is common, i.e., the two parties have committed considerably the same error. The mistake must be of a fact concerned essential to the contract and must be not a collateral or insignificant fact. However, in certain situations, even mistake relating to collateral facts may invalidate a contract.
The concept of mistake under the law of contract carries the notion of a positive belief. Relief would only be granted under the doctrine of mistake if one or both parties entered the contract under a positive belief which was incorrect, rather than merely not having thought about a particular issue.
Thus, in all the cases in which a contract has been held to be void. for common mistake, it seems that the parties had a positive belief that X was the case when it was not, rather than merely making no assumptions about whether X was so or not. Similarly, in the cases of unilateral mistake over the terms, one party has positively thought the terms he has offered, or has been offered, are Y when Y is not what in fact was said or written. It is very doubtful whether relief can be given on the ground of mistake when the party was simply unaware that the terms on offer included a particular clause, as opposed to positively believing that they were Y when they were not. However, it seems that the positive belief may be that something is not the case, e.g., that the terms on offer do not include a particular clause or that the other party is not Z.
Mistake of Fact and not Mistake of Law
A mistake in a contract can be classified as a mistake of fact and a mistake of law. It is a general rule of law that the former may entitle a party to a relief from the contract, while the latter affords no ground of relief to the affected party under the contract. Thus, for the purposes of law, common mistake or unilateral mistakes are relevant only to the extent if the mistake is over the terms (or the identity of one party) i.e., the situation concerning the facts and not the law – for example, the price or the contractual description of what is being sold. In case of a common mistake unaccompanied by fraud, the courts may grant relief if the subject of the contract is so materially variant from what the parties supposed it to be that the substantial object of the transaction has failed.
In a case of a mistake of law, however, it does not affect the legal validity or the altogether binding nature of the contract. If the contract is clear and unambiguous, a mistake on part of one of the parties as to its legal effect, that is, the construction and effect given by the law thereto, does not affect the binding force of the contract in any way. Further, it is immaterial that a mistake as to the legal effect of the contract is caused by a reliance on the statements of a third person, made without the knowledge of the other party and for which the latter was not responsible.
Key Elements of a Strong Business Contract
In the theory of mistake, the fundamental principle is that if the legal rights of the parties have been changed by mistake, equity would restore them to their former status, where it can be achieved without interfering with any of the new rights gained on the faith and power of the changed legal rights condition without any injustice being done to either party.
Mistake of law may be a ground for relief when coupled with certain other circumstances like unfair or deceptive conduct. All the cases which deny a remedy for mere mistake of law on one side are careful to add the qualification that there must be no improper conduct on the other side. If such is not the case, the court may grant relief to the affected party where it has been led into the mistake by misrepresentations of the defendant, or where the defendant takes an improper advantage of the complainant’s ignorance of a matter of law. [2]
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Fundamental and Collateral Mistake of Law
The contract between the parties may be nullified by the court if the mistake of fact on the basis of which the contract was formulated is so fundamental is nature that it materially affects the performance, makes the “contractual adventure” impossible, or makes performance essentially different to what the parties anticipated. In such a scenario, the contract would be declared void. If the fact about which one or both may be mistaken is collateral in the sense that the contract is not made on the express or implied agreement, warranty of understanding that the fact exists so that it is a matter not entering into the contract, with reference to which each takes the chance or assumes the risk, the contract stands as made.
Nonexistence of a thing which is the subject-matter of the contract, the existence of which is actually assumed by both parties when the contract was made, is a clear case of intrinsic mistake. Thus, a contract to sell a horse which, unknown to the parties, had died before the contract was made, cannot be enforced. [3] The usual collateral mistakes which give no right to rescind or modify the contract are mistakes as to the quality, desirability or fitness of the property involved, mistakes ag to collateral facts which affect the value or desirability of the subject-matter of the transaction, where there is no express or implied representation by the other party which causes the mistake.
There is no duty to disclose to the seller facts which will make him place a higher value on his property. They are not collateral, however, if they are so definitely part of the transaction that both parties must be regarded as assuming them to exist as the basis of the contract, conveyance or sale. To enforce the contract or to allow the executed transaction to stand as made in such cases would be contrary to what the parties actually intended, as unjust in every respect as to enforce it against a party misled by innocent misrepresentation.
However, it has been argued that an appropriate test for determining whether a mistake is fundamental is to ask the parties “what are you contracting about”? If they would both identify the subject matter in terms that are correct the mistake is not fundamental. If they would identify the subject matter in terms that in fact are not correct, the mistake is fundamental. [4]
Burden of Proof
The burden of establishing the mistake on the basis of which the relief is sought is on the party alleging it and an unreasonable delay in seeking to avoid the contract after knowledge of the facts, a party may lose his right to rescind the contract. [5]
Waiver of Mistake
There are certain situations where the party alleging the contract to be void on grounds of mistake would be entitled to the remedies. These restrictions are, in large part, implicit in the general theory of mistake itself. In a case where a party was knowingly aware of the possibility that the assumption was incorrect or recklessly disregarded the evidence that made it aware of that risk, the general concept of mistake cannot be taken advantage of by that party. In terms of the actor being consciously aware that he has only limited knowledge of a reality, but treating his limited knowledge as adequate, this phenomenon is often defined. The actor is described in such cases as being “consciously ignorant.”
The definition of conscious ignorance is not to be taken too far. In particular, it should not be expanded to exclude relief on the ground that, by means of an unbounded hunt, the parties may have disapproved of their common erroneous tacit assumption. In these and several other cases, the courts have held that a common mistaken implicit presumption excuses the adversely affected party’s relief even if their error would have been disavowed by an unbounded quest by both parties. [6] These holdings are reasonable because it is always entirely logical not to perform an unbounded search to check a tacit presumption for actors.
Another restriction on the general principle that governs mutual erroneous assumptions is that, in the absence of an agreement to the contrary, if one contracting party is in a position to have clearly superior knowledge as to the probability that the assumption is erroneous, that party should be considered to be taking the risk.
This is partly a relevant data rule as it compels the party in a situation to have formally superlative data on the possibility that the assertion is inaccurate, A, perhaps to say nothing at all and take the responsibility, or B, point the risk to the other party. At that stage, B, now aware of the risk, may directly require A to accept the risk, agree to accept the risk himself, or propose an intermediate solution.
In yet another landmark decision, A, an instrument of the Australian government, asserted that a tanker was plunged on the Jourmand Reef and went on to sell the tanker to the potential buyer, B. To save the tanker, B set out. Actually, the tanker simply did not exist, and B sued him for breach of contract. A defended, on the basis that both sides were wrong. Properly preserved by the tribunal for B. A was in a position to know if, as B was not, the wrecked tanker existed. Indirectly, A’s tender indicated that the tanker existed because of the obviously superior role of A in knowledge. If A was less than sure of the tanker’s presence, it ought to have made that clear.
Conclusion
The doctrine of mistake can be used by the parties to the contract to waive their contractual liabilities in case they entered the contract on the basis of something else as regards to the facts of the material. Considering the intricacies and complex nature of the doctrine and the difficulty that may arise in proving that the party entered the contract due to a mistake, it is generally advised that the parties before entering a contract conduct a proper and thorough due diligence and other factual checks, in order to remove any ambiguities from the minds of the parties.
REFERENCES
- Smith v. Hughes LR 6 QB 607.
- Terry v. Moore (Com. Pl. Gen. T., 1893) 3 Misc. 290, 52 State Rep. 403, 22 N. Y. S. 788, on later appeal 12 Misc. 641, 67 State Rep. 499, 33 N. Y. S. 846.
- Allen v. Hammond 36 U. S. (11 Pet.) 63, 71 (1837).
- Peel, Treitel on The Law of Contract (14th edn., 2015).
- Balwin v. Van Deusen (1868) 37 N. Y. 487, 5 Trans. App. 18.
- Dover Pool & Racquet Club v. Brooking 322 N.E.2d 168, 169-71 (Mass. 1975).
BY KARTIK SINGH | NATIONAL LAW UNIVERSITY, ODISHA