This article examines the meaning and effect of the doctrine of mistake in contract law, including the different types of mistake, how these may impact on the validity of a contract and the legal remedies available for ‘mistake contracts’.
What is a ‘mistake contract’?
Mistake is a legal concept in contract law. It refers to an erroneous belief held by one or both parties to a contract at the time the agreement is entered into. A contract entered into under a mistake (or a ‘mistake contract’) may arise in various different ways including:
- a mistake as to the subject matter or nature of the transaction.
- a mistake as to the terms of the contract.
- a mistake as to the identity of the person with whom the contract is entered into.
Mistake should not be confused with misrepresentation. A misrepresentation is a false statement of fact made by one party to another – whether innocent, negligent or fraudulent – which, whilst not being a term of the contract, induces the other party to enter the contract.
The effect of an actionable misrepresentation is to render the contract voidable, giving the aggrieved party the right to rescind the contract or to have it set aside by the court. A mistake, on the other hand, can potentially render a contract void or voidable. A void contract is one that is declared a nullity, such that it is wholly lacking in legal effect and no rights or obligations can be derived under it.
Types of ‘mistake contracts’
English law recognises three different types of mistake:
- common mistake – both parties make the same mistake.
- mutual mistake – the parties are at cross-purposes with each other.
- unilateral mistake – only one party makes the mistake.
Common mistake contract
A common mistake occurs where the parties entered into a contract operating under a shared misapprehension or misguided belief as to a matter of existing fact or law. A common mistake that goes to the very root of the contract will potentially render the contract void.
The court must be satisfied that the mistake is so fundamental, such that performance under the contract is either impossible, or performance is essentially different from that which the parties anticipated.
In particular, a contract will be void at common law where the subject matter of the contract no longer exists, for example, a contract for the sale of goods where those goods have already perished. Similarly, the contract will be void if the buyer makes a contract to buy something that in fact already belongs to him.
A contract will not generally be void for mistake if it relates to the quality of the subject matter, as this is unlikely to render performance fundamentally different to that originally agreed.
Mutual mistake contract
A mutual mistake is one where the parties are at cross-purposes. In other words, it is a misunderstanding between the parties entering into a contract as to a material fact.
A mutual mistake will only affect the validity of the contract if the mistake is so fundamental that it nullifies consent. If the mistake goes to the heart of the contract, the contract will be rendered void.
The courts will apply an objective test to see if the contract can be saved, ie; what would a reasonable person have understood the contract to mean. If, in light of the parties’ words and conduct, there is only one possible interpretation of what was agreed, the contract will still be valid. If, on the other hand, a reasonable person could not determine the meaning then the contract will be held void for mistake.
Unilateral mistake contract
A unilateral mistake occurs where only one party is mistaken. This includes a mistake relating to the terms of the contract or mistake as to the identity of the person with whom the contract is entered into.
Whilst only one party must be mistaken about the terms of the contract, the other party must know or ought to have known of the mistake to invalidate the contract. The courts will apply a subjective test, ie; from the point of view of the mistaken party’s intention in entering into the contract.
Mistakes as to identity are generally induced by fraud in that one of the parties is claiming to be someone who they are not. As such, there is an overlap here with the law of misrepresentation and whether a contract is rendered void or voidable.
This distinction is particularly significant in the context of third party rights. By way of example, where goods have been acquired under a contract and sold on to a third party acting in good faith, the mistaken party can seek to recover the goods from the innocent third party if the contract is void. If, on the other hand, the contract is voidable, the purchaser will acquire good title.
Effects of a ‘mistake contract’
Only those mistakes that operate to negative consent will render a contract void. A ‘mistake contract’ that is void must be distinguished from one that is merely voidable. A contract that is void produces no legal relationship between the parties and has no legal effect. The contract is said to be void ab initio, ie; from the beginning, as if the contract was never made.
This means that neither party is able to sue the other on the contract, and any payments made or property transferred under the contract are recoverable since neither party has any entitlement to what he has received. Alternatively, if the contract is voidable, the contract will have been valid from the start and obligations may arise under it despite the mistake.
A voidable contract is one that a party is entitled to rescind or to have set aside by the court. However, until the mistaken party exercises its right to rescind, the contract remains valid and legally binding. Rescission has the effect of cancelling the contract and restoring the parties, so far as possible, to their pre-contractual position.
Remedies for a ‘mistake contract’
If argued successfully, mistake can lead to an agreement being found either void or voidable by the courts. If a contract is found to be void, where appropriate the court will order restitution, ie; recovery of any monies paid or property transferred by mistake. In circumstances where a contract is found to be voidable, the court may look to any one the following equitable remedies:
- rescission – this is where the contract is set aside and the parties are returned to the position in which they were before the contract was made.
- specific performance – this is where the court can compel a party to perform its contractual obligations.
- rectification – this is where the court can correct an error of expression where a written document does not accord with what was agreed orally.
For an in-depth look at mistake contracts
The law relating to mistake contracts can be highly complex. This article provides only an overview of some of the legal principles involved in the law relating to mistake. For more detailed guidance on this topic, students should refer to specific texts or analysis on the subject, with reference to all recent and leading case law.
The matters contained in this article are intended to be for information purposes only. This article does not constitute legal advice and should not be treated as such. Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission. Before acting on any of the information contained herein, expert legal advice should be sought.