Contracts/Mistake

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Template:ContractLaw In contract law a mistake is an erroneous belief, at contracting, that certain facts are true. It may be used as grounds to invalidate the agreement. Common law has identified three different types of mistake in contract: unilateral mistake, honest mistake, mutual mistake, and common mistake.

Unilateral mistakes

A unilateral mistake is where only one party to a contract is mistaken as to the terms or subject-matter. The courts will uphold such a contract unless it was determined that the non-mistaken party was aware of the mistake and tried to take advantage of the mistake.

Leading cases on unilateral mistake are Smith v. Hughes [1871] and Hartog v. Colin & Shields [1939] 3 All E.R. 566.

Mistake of identity

It is also possible for a contract to be void if there was a mistake in the identity of the contracting party. In the leading English case of Lewis v Avery [1971] 3 All ER 907 Lord Denning held that the contract can be avoided only if the plaintiff can show, that at the time of agreement, the plaintiff believed the other party's identity was of vital importance. A mere mistaken belief as to the credibility of the other party is not sufficient.

Shogun Finance v Hudson (2004) is now the leading UK case on mistake as to identity. In this case, the House of Lords stated there was a strong presumption the owner intends to contract with the person physically present before him and only in extreme cases would the presumption be rebutted.

Mutual mistake

A mutual mistake occurs when the parties to a contract are both mistaken but about the same material fact within their contract. They are at cross-purposes. As such, there is no consensus ad idem, and this overlaps with the objective theory of contract, and there is no offer and acceptance. Hence the contract is void.

Raffles v. Wichelhaus 2 H. & C. 906 (Ex. 1864)

(PLEASE NOTE: Many contract professors prefer to use this case to display "misunderstanding". Misunderstanding is a different legal term of art than Mutual Mistake. Whereas Mutual Mistake is predicated on the same factual error relied on by both parties, misunderstanding occurs when a term of the contract is interpreted in two separate ways by the parties.)

Plaintiff Raffles agreed to sell 125 bales of Indian cotton at 17 pence per pound to Defendant Wichelhaus with payment to be made within a specified time after the arrival of the cotton in Liverpool, England. The parties’ agreement provided that the cotton was “to arrive ex Peerless from Bombay.” However, there were two different ships named “Peerless” regularly sailing from Bombay to England, one leaving in October and the other in December. Plaintiff Raffles shipped the cotton on the December Peerless, and defendant Wichelhaus refused to accept the cotton. Raffles sued on the alleged contract. Wichelhaus argued that it understood the shipment would be shipped on the October Peerless. Raffles argued that it was immaterial which Peerless was used, “so long as it was a ship called the ‘Peerless.’” Plaintiff also argued that the words “to arrive ex Peerless” only meant that if the vessel were lost on the voyage, the contract was ended. Holding for the defendant Wichelhaus, the court concluded there was “no binding contract.” Since the parties meant different ships, “there was no consensus ad idem.”

The buyer agreed to purchase cotton from the seller. The parties agreed the cotton would be shipped on the ship “Peerless.” Unknown to the parties, there were two ships Peerless. Buyer knew of October Peerless and expected the cotton to be shipped on October Peerless. But Seller knew of December Peerless and shipped the cotton on December Peerless. Buyer refused to accept the shipment when it arrived later than Buyer expected, and Seller sued. The court held there was no contract since “there was no consensus ad idem.” (No agreement as to the matter.)

Mutual mistakes are rare, but they do occur. If there is a true mutual mistake, there is no contract, even though it may be said there was a meeting of the minds.

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. 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, 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.

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