Contract - Mistake Flashcards
What is the effect of mistake on a contract?
A contract will not be binding if it is the result of a certain type of mistake on the part of one or both of the contracting parties.
What is an operative mistake?
Operative mistake- A mistake that is so fundamental that either prevents the formation
of a contract (as no genuine agreement can be said to have been reached between the parties) or makes the contract something fundamentally different to that which was originally intended.
Effect = generally to render the contract void from the outset.
If the mistake is not operative, can still be voidable in equity.
Courts are reluctant to correct contracts for mistake but will intervene where a literal interpretation will lead to results described as ‘arbitrary, irrational, commercially, nonsense or absurd’.
When can the doctrine of mistake come into play?
The contract must have failed to allocate the risk of mistake occurring to either party, expressly or impliedly.
What are the categories of mistake?
1) Common mistake: has been a genuine agreement and occurs where both parties to an agreement are suffering from the same mistaken belief.
2) Mutual mistake- occurs where both parties are mistaken but they are mistaken about different things-they have negotiated at cross-purposes
3) Unilateral mistake - occurs where only one party is mistaken and the other party knows, or is deemed to know of the mistake.
What is common mistake?
Both parties to the agreement are suffering from the same misapprehension.
Mistake as to the:
1) Existence of the contract’s subject matter
- This occurs where the parties have made a contract about something which has ceased to exist at the time the contract is made (e.g. X contracts with Y to buy a painting, but without either party knowing, that the painting was in fact destroyed prior to contracting)
2) Title: i.e. the ownership of the subject matter:
3) Quality: as to the quality of the subject matter
- Where the subject matter is essentially different to that intended or where the mistake renders the assumed performance impossible, or where the subject matter is rendered radically different.
When will mistake not operate?
Common mistake will not operate where:
- The mistake is not sufficiently fundamental.
- One party is at fault.
- The contract makes provision for that issue.
How will the court assess a mutual mustake?
An objective test is used:
1) What a reasonable third party would believe the agreement to be, based on the words and conducts of the parties
If from the available evidence, a reasonable person would infer the existence of a contract in a given sense, the court will hold that a contract in that sense is binding on the parties, notwithstanding a material mistake.
Example: Scriven Bros v Hindley-buyer bid for product at auction thinking it was hemp, the product was actually tow, when the buyer discovered he bid for tow, he refused to pay-the buyer mistakenly believed he was bidding for hemp, the auctioneer understood he was selling tow but the buyer was mistaken about the value of the tow-mutual mistake.
Raffles v Wichelhaus-one party understood delivery referred to October ship, other party understood it referred to the December ship-it was impossible to determine which ship the contract referred to-mutual mistake.
What if only one party is at fault in a mutual mistake?
Where the court thinks the buyer is to blame and did not have reasonable grounds to justify the mistake, the court will not declare the contract to be bound.
In a scenario where one of the parties is mistaken because he has been careless of reckless, rather than because of ambiguity or misrepresentation, the party at fault will be bound by the agreement.
What is unilateral mistake?
Where one party is mistaken and the other party knows, or is deemed to know of the mistake?
Most common mistakes are as to the
1) Terms of the contract
2) Nature of the document
3) Mistake as to a person’s identity
In order for mistake to vitiate a contract, the mistake must relate to the term of the contract, not simply to a collateral matter.
What are the three conditions for unilateral mistake which the mistaken party must prove?
1) The other party was aware, or should have been aware of the first party’s mistake at the time of the contract was made, e.g. is aware what the market practice is
2) The mistake was in respect of a term induced the first party to enter into the contract not a collateral matter - e.g. getting new oats instead of old oats, even though you want old oats is not enough.
3) Mistaken party was not at fault (for example, if the mistaken party is careless or negligent in reaching his mistaken conclusion, he cannot rely on unilateral mistake).
What is the general rule regarding unilateral mistake as to the nature of the document signed?
General rule: A person is usually bound by the terms of a document they have signed, regardless of whether they have read or understood it.
Exception 1:
Where the person signed the document as a result of a fraudulent misrepresentation as to the nature of the document. NOTE: there is still a duty on the person signing to take reasonable care prior to signing it.
Exception 2: Where the person signing is illiterate, blind or signing from a form of mental incapacity.
Example: An illiterate woman was induced to execute a deed in the belief it was concerned with arrears of rent-the document was a deed releasing another from claims which the woman had against him-deed was a nullity.
What is unilateral mistake of identity?
One party mistakenly believes they are contracting with a person that the other party is pretending to be, whether or not such a contract is void depends on the precise circumstances.
Face-to-face scenarios
*Law applies a presumption that the mistaken party intends to deal with the person physically present regardless of their identity.
*Unless the seller can rebut this presumption by providing evidence to prove that his decision to sell the goods was made on the basis of the other party’s identity, he will not be able to claim the identity of the other party to the contract was a term of the contract.
*If the person is mistaken in respect of a collateral matter (e.g., creditworthiness), the mistaken party cannot rely on the doctrine of mistake.
*The presumption will only be rebutted if the seller is able to establish that identity rather than attributes was of vital importance.
Lewis v Averay-what the seller really cared about in this case was Mr Green’s creditworthiness (thinking if he was a famous actor, he was rich), an attribute rather than a matter identity-so whilst the contract was voidable for misrepresentation, it was not void for mistake.
What is non face to face mistake of identity?
it is more difficult to allege you are mistaken as to the identity of the other contracting party when they are standing in front of you.
If someone pretends to be another person = void for mistake as to identity
Example cases:
Cundy v Lindsay-evidence showed claimants only ever intended to deal with the well-known brand and that this identity was key to the seller’s decision to send the goods on credit-the identity was a term of the contract, which allowed the contract to be held void for unilateral mistake.
Shogun Finance v Hudson-fraudster visited car showroom and agreed to buy a car on hire-purchase terms, fraudster signed draft agreement in the name of Mr Patel-producing genuine but illegally obtained ID-finance company checked credit rating of Mr Patel and approved sale-fraudster paid minimal deposit and drove car away with accompanying paperwork-fraudster sold car to innocent third party-finance company traced car to Mr Hudson and sued him for the return.
Held-contract void for mistake-car to be returned. Case was decided as a distance-selling situation between finance company and fraudster
Not all non face-face transactions are void:
King’s Norton Metal Co v Edridge Merrett-claimant sent goods on credit to Hallam-fictitious entity-letterhead used by fraudster gave impression of large and successful company-court held mistake was one as to attributes, not identity-claimants intended to deal with writers of the letter, not an identifiable third party.
What is mutual mistake?
Where parties have negotiated at cross-purposes (e.g. A offers to sell X, and B accepts thinking that B is getting Y).
The parties were mistaken over what they were agreeing to and therefore was never a real agreement, there was not the required ‘meeting of minds’.
Example-A sells a horse to B, A intended to sell his chestnut horse, but B thought he was agreeing to buy A’s grey horse-the colour was not mentioned during the formation of the contract.
