In contract law, a mistake is an erroneous belief, at contracting, that certain facts are true. It can be argued as a defense, and if raised successfully, can lead to the agreement in question being found void ab initio or voidable, or alternatively, an equitable remedy may be provided by the courts. Common law has identified three different types of mistake in contract: the 'unilateral mistake', the 'mutual mistake', and the 'common mistake'. The distinction between the 'common mistake' and the 'mutual mistake' is important.
Another breakdown in contract law divides mistakes into four traditional categories: unilateral mistake, mutual mistake, mistranscription, and misunderstanding.[1]
The law of mistake in any given contract is governed by the law governing the contract. The law from country to country can differ significantly. For instance, contracts entered into under a relevant mistake have not been voidable in English law since Great Peace Shipping Ltd v Tsavliris (International) Ltd (2002).[2]
Examples
Mistake can be:
Mistake of law, or
Mistake of fact
Mistake of law: when a party enters into a contract, without the knowledge of the law in the country, the contract is affected by such mistakes, but it is not void. The reason here is that ignorance of law is not an excuse. However, if a party is induced to enter into a contract by the mistake of law then such a contract is not valid.[3]
Illustration: Harjoth and Danny make a contract grounded on the erroneous belief that a particular debt is barred by the Indian law of Limitation; the contract is not voidable.[citation needed]
Mistake of fact: Where both the parties enter into an agreement are under a mistake as to a matter of fact essential to the agreement, the agreement is voidable.
Explanation: An erroneous opinion as to the value of the thing which forms the subject matter of the agreement is not to be deemed a mistake as to a matter of fact.[4]
Illustration: Lady found a stone and sold it as a topaz for $1 ($25 today). It was a raw uncut diamond worth $700 (today $17,000). The contract is not voidable. There was no mistake because neither party knew what the stone was.[5]
Anti-illustration: A sells a cow to B for $80 because it is infertile. The cow is actually pregnant and worth $1000. The contract is void.[6]
3 Historically restricted in common law jurisdictions but generally accepted elsewhere; availability varies between contemporary common law jurisdictions
A unilateral mistake is where only one party to a contract is mistaken about the terms or subject-matter contained in a contract.[7] This kind of mistake is more common than other types of mistake.[citation needed] One must first distinguish between mechanical calculations and business errors when looking at unilateral mistake.[citation needed]
Ordinarily, unilateral mistake does not make a contract void.[8] Traditionally this is caveat emptor (let the buyer beware), and under common law caveat venditor (let the seller beware).
Exceptions
A contract might be voidable from unilateral mistake for any of the following:
One party relied on a statement of the other about a material fact that the second party knew or should have known was mistaken by the first party.[8]
For mechanical calculations, a party may be able to set aside the contract on these grounds provided that the other party does not try to take advantage of the mistake, or 'snatch up' the offer (involving a bargain that one did not intend to make, betrayed by an error in arithmetic, etc.). This will be seen by an objective standard, or if a reasonable person would be able to know that the mistake would not make sense to one of the parties. Unless one of the parties 'snatched up' the one-sided offer, courts will otherwise uphold the contract.[citation needed]
The mistake was "unconscionable", i.e., so serious and unreasonable to be outrageous.[8]
Mutual mistake versus failure of mutual assent
A mutual mistake occurs when the parties to a contract are both mistaken about the same material fact within their contract. They are at cross purposes. There is a meeting of the minds, but the parties are mistaken. Hence the contract is voidable. Collateral mistakes will not afford the right of rescission. A collateral mistake is one that "does not go to the heart" of the contract. For a mutual mistake to render a contract void, then the item the parties are mistaken about must be material (emphasis added). When there is a material mistake about a material aspect of the contract, the essential purpose of the contract, there is the question of the assumption of the risk. This risk may be determined contractually or according to custom. In American law, the Restatement (Second) of Contracts Sec. 154 deals with this scenario.
This is easily confused with mutual assent cases such as Raffles v Wichelhaus.[9] In Raffles, there was an agreement to ship goods on a vessel named Peerless, but each party was referring to a different vessel. Therefore, each party had a different understanding that they did not communicate about when the goods would be shipped.
In this case, both parties believed there was a "meeting of the minds", but discovered that they were each mistaken about the other party's different meaning. This represents not a mutual mistake but a failure of mutual assent. In this situation, no contract has been formed, since mutual assent is required in the formation stage of contract. In American law, the Restatement (Second) Contracts Sec. 20 deals with this scenario.
Common mistake
A common mistake is where both parties hold the same mistaken belief of the facts.
The House of Lords case of Bell v Lever Brothers Ltd.[10] established that common mistake can void a contract only if the mistake of the subject matter was sufficiently fundamental to render its identity different from what was contracted, making the performance of the contract impossible.
Later in Solle v Butcher,[11]Lord Denning added requirements for common mistake in equity, which loosened the requirements to show common mistake. However, since that time, the case has been heavily criticized in cases such as Great Peace Shipping Ltd v Tsavliris (International) Ltd.[2] For Australian application of Great Peace Shipping (other than in Queensland), see Svanosio v McNamara.[12] For Queensland, see Australian Estates v Cairns City Council.[13]
Those categories of mistake in the United States exist as well, but it is often necessary to identify whether the error was a "decisional mistake", which is a mistake as a matter of law (faced with two known choices, making the wrong one), or an "ignorant mistake", unaware of the true state of affairs.
The difference is in the extent to which an innocent in the information chain, passing along or using or processing incorrect information, becomes liable. There is a principle that an entity or person cannot be made more liable merely by being in the information chain and passing along information taken in good faith in the belief that it was true, or at least without knowledge of the likelihood of falsity or inaccuracy.
Roswell State Bank v. Lawrence Walker Cotton Co.
Under New Mexico law a bank, title company, document processing firm, or the like is not liable for false information provided to it, any more than a bank was liable for false information from a trusted customer turned embezzler who drew an unauthorized cashier's check:[14]
A thing is done "in good faith" within the meaning of this act, when it is in fact done honestly, whether it be done negligently or not.
...
... [A] transferee is not bound to inquire whether the fiduciary is committing a breach of his obligation as fiduciary in transferring the instrument, and is not chargeable with notice that the fiduciary is committing a breach of his obligation as fiduciary unless he takes the instrument with actual knowledge of such breach or with knowledge of such facts that his action in taking the instrument amounts to bad faith.
56 N.M. at 112–113 (quoting from the Uniform Fiduciaries Act[15]).
Davis v. Pennsylvania Co. 337 Pa. 456
Roswell was the case of first impression on this issue in the state of New Mexico, and drew on cases in other jurisdictions interpreting the same language, most notably Davis v. Pennsylvania Co. 337 Pa. 456,[16] which on similar facts to Roswell came to the same conclusion and exonerated the innocent actor in favor of shifting any responsibility for the loss to tortfeasors and those who enabled them to act by giving them unjustified authority.[17]
The Davis case leads into another good analysis, in a case relied upon by Davis:
At what point does negligence cease and bad faith begin? The distinction between them is that bad faith, or dishonesty, is, unlike negligence, wilful. The mere failure to make inquiry, even though there be suspicious circumstances, does not constitute bad faith, unless said failure is due to the deliberate desire to evade knowledge because of a belief or fear that inquiry would disclose a vice or defect in the transaction, – that is to say, where there is an intentional closing of the eyes or stopping of the ears.
French Bank of California v. First National Bank of Louisville
In Kentucky, it was held in French Bank of California v. First National Bank of Louisville that money received by mistake does not have to be returned if there is an irrevocable change in position. It held that mistakes do not need to be rectified except by court order or indemnities being issued.
Union Bank & Trust Co. v. Girard Trust Co.
In Union Bank & Trust Co.v. Girard Trust Co.,[18] a firm processing information in order to transfer title using the information provided by customers lacked the intent to commit illegal or improper acts when the information furnished to it was wrong. It was not part of its job description to know better, and it did not know better and charged only a nominal fee for the clerical work, clearly not including any investigation. Further, it could not be in a conspiracy with another party or several parties who knew the information was wrong but failed to inform the title firm. The title firm could not unknowingly become part of a conspiracy of which it was never informed, and from which it could derive no benefit. The attempt to enhance liability or shift blame by filtering data through an innocent party has been tried before, but where the conduit providing document preparation does not know more than its informants and was not hired or paid to investigate, it is not liable in their place for using their bad facts without guilty knowledge.
Hynix Semiconductor America, Inc. v. United States
The U.S. Court of International Trade has gathered the law governing record-keeping mistakes and how they are corrected in Hynix Semiconductor America, Inc. v. United States[19] in which the Court was faced with the application of a tariff that had been calculated at the wrong rate by a customs clerk. To enforce "anti-dumping" legislation against foreign-made goods (in this case, Korean electronic components) made using cheap labor and undercutting American industry, a regulatory scheme was implemented under which such imports were charged a "liquidation duty" at a rate to be found on a schedule. The schedule had been made up by a panel of experts using standards for adjusting the price differential in overseas goods. The custom clerk used the wrong category of goods and overcharged the duty, and by the time Hynix figured out what had happened, part of a very short statute of limitations on protest had expired. Hynix nevertheless prevailed and received the correction in its tariff rate by showing that such an error "was correctable under 19 U.S.C. § 1520(c) as a mistake of fact or clerical error not amounting to an error in the construction of a law and because the failure to file a protest within ninety days of the liquidation of the entries is without legal consequence in this context".[20]
The Hynix court explains the difference between a mistake of law "where the facts are known, but the legal consequences are not, or are believed to be different than they really are" (Century Importers, Inc. v. United States, 205 F.3d 1308, 1313 (Fed. Cir. 2000)), and a mistake of fact, "where either (1) the facts exist, but are unknown, or (2) the facts do not exist as they are believed to [exist]" (Hynix, 414 F. Supp. 2d. at 1325, quoting Hambro Auto. Corp. v. United States, 66 C.C.P.A. 113, 118, C.A.D. 1231, 603 F.2d 850, 853 (1979): "A mistake of fact is any mistake except a mistake of law."[21]).
Hynix, in reviewing the tariff application to the facts, also provided a guided tour of the different kinds of mistake and how they are treated in the federal court system. The key distinction is between "decisional mistakes" and "ignorant mistakes".[22][23][24][25]
‘Decisional mistakes are mistakes of law and occur when "a party [makes] the wrong choice between two known, alternative sets of facts". Universal Cooperatives, (citation partly omitted), 715 F. Supp. at 1114. On the other hand, an ignorant mistake occurs where "a party is unaware of the existence of the correct alternative set of facts". Id. "In order for the goods to be reliquidated under 1520 (c) (1), the alleged mistake of fact must be an ignorant mistake." Prosegur (citation partly omitted), 140 F. Supp. 2d at 1378. Hynix at 1326.
Hynix provided one more criterion, and that is "materiality", citing to extensive development of that requirement in Degussa Canada Ltd. v. United States, 87 F.3d 1301, 1304 (Fed. Cir. 1996), and Xerox Corp. v. United States, 2004 C.I.T. (Sept. 8, 2004) ("[A] mistake of fact ... is a factual error that, if the correct fact had been known, would have resulted in a different classification.") The error must be "material" in order to be corrected without consequence.
A fiduciary is a person who holds a legal or ethical relationship of trust with one or more other parties. Typically, a fiduciary prudently takes care of money or other assets for another person. One party, for example, a corporate trust company or the trust department of a bank, acts in a fiduciary capacity to another party, who, for example, has entrusted funds to the fiduciary for safekeeping or investment. Likewise, financial advisers, financial planners, and asset managers, including managers of pension plans, endowments, and other tax-exempt assets, are considered fiduciaries under applicable statutes and laws. In a fiduciary relationship, one person, in a position of vulnerability, justifiably vests confidence, good faith, reliance, and trust in another whose aid, advice, or protection is sought in some matter. In such a relation, good conscience requires the fiduciary to act at all times for the sole benefit and interest of the one who trusts.
A fiduciary is someone who has undertaken to act for and on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence.
Unconscionability is a doctrine in contract law that describes terms that are so extremely unjust, or overwhelmingly one-sided in favor of the party who has the superior bargaining power, that they are contrary to good conscience. Typically, an unconscionable contract is held to be unenforceable because no reasonable or informed person would otherwise agree to it. The perpetrator of the conduct is not allowed to benefit, because the consideration offered is lacking, or is so obviously inadequate, that to enforce the contract would be unfair to the party seeking to escape the contract.
Bell v Lever Brothers Ltd [1931] UKHL 2 is an English contract law case decided by the House of Lords. Within the field of mistake in English law, it holds that common mistake does not lead to a void contract unless the mistake is fundamental to the identity of the contract.
In common law jurisdictions, a misrepresentation is a false or misleading statement of fact made during negotiations by one party to another, the statement then inducing that other party to enter into a contract. The misled party may normally rescind the contract, and sometimes may be awarded damages as well.
In contract law, rescission is an equitable remedy which allows a contractual party to cancel the contract. Parties may rescind if they are the victims of a vitiating factor, such as misrepresentation, mistake, duress, or undue influence. Rescission is the unwinding of a transaction. This is done to bring the parties, as far as possible, back to the position in which they were before they entered into a contract.
Sherwood v. Walker, 66 Mich. 568, 33 N.W. 919, was a case that has played an important role in the evolution of American contract law involving the doctrine of mutual mistake. One of the main issues in the case was whether the remedy of rescission is available if both parties to a contract share a misunderstanding about an essential fact. Commonly referred to as the "Pregnant Cow Case," the case is a staple of first-year law school contract law class discussions and textbooks and has been briefed extensively online.
The law of mistake comprises a group of separate rules in English contract law. If the law deems a mistake to be sufficiently grave, then a contract entered into on the grounds of the mistake may be void. A mistake is an incorrect understanding by one or more parties to a contract. There are essentially three types of mistakes in contract,
A contract is an agreement that specifies certain legally enforceable rights and obligations pertaining to two or more mutually agreeing parties. A contract typically involves the transfer of goods, services, money, or a promise to transfer any of those at a future date. In the event of a breach of contract, the injured party may seek judicial remedies such as damages or rescission. A binding agreement between actors in international law is known as a treaty.
Lac Minerals Ltd v International Corona Resources Ltd is a leading Supreme Court of Canada decision on the nature of fiduciary and confidential relationships that can be created in the course of business, together with appropriate remedies for restitution when such relationships are breached.
Contract law regulates the obligations established by agreement, whether express or implied, between private parties in the United States. The law of contracts varies from state to state; there is nationwide federal contract law in certain areas, such as contracts entered into pursuant to Federal Reclamation Law.
Attorney General v Blake[2000] UKHL 45, [2001] 1 AC 268 is a leading English contract law case on damages for breach of contract. It established that in some circumstances, where ordinary remedies are inadequate, restitutionary damages may be awarded.
Elektra Records Co. v. Gem Electronic Distributors, Inc., 360 F. Supp. 821, was an important case before the United States District Court for the Eastern District of New York that concerned copyright infringement, which held that secondary persons or entities could be liable for that tort under certain circumstances, and is also called the "'make-a-tape' case".
Interpreting contracts in English law is an area of English contract law, which concerns how the courts decide what an agreement means. It is settled law that the process is based on the objective view of a reasonable person, given the context in which the contracting parties made their agreement. This approach marks a break with previous a more rigid modes of interpretation before the 1970s, where courts paid closer attention to the formal expression of the parties' intentions and took more of a literal view of what they had said.
Constructive trusts in English law are a form of trust created by the English law courts primarily where the defendant has dealt with property in an "unconscionable manner"—but also in other circumstances. The property is held in "constructive trust" for the harmed party, obliging the defendant to look after it. The main factors that lead to a constructive trust are unconscionable dealings with property, profits from unlawful acts, and unauthorised profits by a fiduciary. Where the owner of a property deals with it in a way that denies or impedes the rights of some other person over that property, the courts may order that owner to hold it in constructive trust. Where someone profits from unlawful acts, such as murder, fraud, or bribery, these profits may also be held in constructive trust. The most common of these is bribery, which requires that the person be in a fiduciary office. Certain offices, such as those of trustee and company director, are always fiduciary offices. Courts may recognise others where the circumstances demand it. Where someone in a fiduciary office makes profits from their duties without the authorisation of that office's beneficiaries, a constructive trust may be imposed on those profits; there is a defence where the beneficiaries have authorised such profits. The justification here is that a person in such an office must avoid conflicts of interest, and be held to account should he fail to do so.
Great Peace Shipping Ltd v Tsavliris (International) Ltd [2002] EWCA Civ 1407 is a case on English contract law and on maritime salvage. It investigates when a common mistake within a contractual agreement will render it void.
Pilmer v Duke Group Ltd is an Australian company law case concerning the adequacy of consideration paid for shares, as well as on the questions of duty of care and fiduciary duty owed by experts retained in such matters.
South African contract law is "essentially a modernized version of the Roman-Dutch law of contract", and is rooted in canon and Roman laws. In the broadest definition, a contract is an agreement two or more parties enter into with the serious intention of creating a legal obligation. Contract law provides a legal framework within which persons can transact business and exchange resources, secure in the knowledge that the law will uphold their agreements and, if necessary, enforce them. The law of contract underpins private enterprise in South Africa and regulates it in the interest of fair dealing.
Westdeutsche Landesbank Girozentrale v Islington LBC[1996] UKHL 12, [1996] AC 669 is a leading English trusts law case concerning the circumstances under which a resulting trust arises. It held that such a trust must be intended, or must be able to be presumed to have been intended. In the view of the majority of the House of Lords, presumed intention to reflect what is conscionable underlies all resulting and constructive trusts.
Solle v Butcher [1950] 1 KB 671 is an English contract law case, concerning the right to have a contract declared voidable in equity. Denning LJ reaffirmed a class of "equitable mistakes" in his judgment, which enabled a claimant to avoid a contract. Denning LJ said,
... a contract will be set aside if the mistake of the one party has been induced by a material misrepresentation of the other, even though it was not fraudulent or fundamental; or if one party, knowing that the other is mistaken about the terms of an offer, or the identity of the person by whom it is made, lets him remain under his delusion and concludes a contract on the mistaken terms instead of pointing out the mistake.... A contract is also liable in equity to be set aside if the parties were under a common misapprehension either as to facts or as to their relative and respective rights, provided that the misapprehension was fundamental and that the party seeking to set it aside was not himself at fault.
Cooper v Phibbs [1867] UKHL 1 is an English contract law case, concerning the doctrine of mistake.
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