Mistake Issues

Most Mistakes do not Negate Contract

The law limits the types of mistake, on the basis of which a contract might be avoided. A mistake in the everyday sense will not usually be sufficient to avoid a contract.  The fact that a contract proves highly unprofitable, foolish and illogical with the benefit of hindsight or even at the time, is irrelevant.  The allocation of risk may be express or implied.  There may be contractual terms providing precisely for the circumstances which have arisen.

Unless the person lacks mental capacity or has been misled in some way to make the contract, he will be legally bound to his bargain, no matter how foolish it might be.  Where it becomes impossible to perform a contract, the principle of frustration may apply.  If the performance was impossible all along, then the principle of mistake may apply.

Nature of Mistake Which Negates Contract I

The party who seeks to avoid an agreement on the basis of a mistaken belief must have reasonable grounds for that belief.  Where something foreseeable happens, relief for mistake is unlikely to be allowed.

A fundamental mistake in this context is usually one that relates to the existence or fundamental nature of the thing contracted for. In this case, the contract is void and of no effect.  A mistake about the quality of an item, as opposed to its fundamental nature, does not usually have a legal consequence. It is not operative.

Where the matter contract for, no longer exists, the contract may be capable of being avoided. However, in some cases, there might be an implied obligation on one party or the other to take the risk that this is not the case. In this case, that party takes the risk and is liable for breach of contract.

The circumstances or state of affairs must be unexpected and exceptional. The mistake must be shared by both parties and relate to facts existing at the time.  The mistake about the matter concerned must be such that the contract is radically different to that which the parties believed to exist.

The mistake must relatie to a false and fundamental assumption going to the basis of the contract.  It must not relate to a belief held by one party without a reasonable basis. The mistake must have existed at the time the contract was made.

Nature of Mistake Which Negates Contract II

The mistake may concern an extraneous fact or state of affairs, rather than the thing itself. The parties must make a fundamental assumption that is basic to their agreement. It may be that the particular thing concerned no longer exists. It may be some other basic assumptions about the state of affairs, which is the basis of the contract such that its non-existence can be said to invalidate consent to contract

A mistake regarding the quantity of a purchased subject matter may be sufficient to avoid a contract if the difference in quantity makes the subject matter of the contract radically different to that which both parties believed existed. The principle will apply only if one or the other party did not expressly or impliedly take the contractual risk in relation to the matter concerned.

It was said, traditionally that mistakes as to the quality or a characteristic of the subject matter as opposed to something going to the essence of the subject matter itself, would not be sufficient.  It had to be something essentially different from that which it was believed to be. This is the common law position.

In practice, the difference between quality and essential characteristics is a matter of degree and judgment.  The test is sometimes expressed in terms of the matter being so fundamental as to go “to the root” of the contract or transaction.

Traditionally Mistakes of Law Insufficient

Traditionally, a distinction was made between so-called mistakes of law and mistakes of fact.  Until relatively recently, it appeared that mistakes of law could never be effective to avoid a contract.  If for example, one party’s legal advisor misunderstood the law, no relief could be given for a mistake thereby made. The law was something which each party was deemed to know.

The mistake of law may relate to the interpretation of private documents and their effects.  Even when the rule was applied to its full rigour, exceptions were allowed.  If one party is primarily responsible for the mistake, then payments could be recovered on restitution principles. In a number of cases involving public authorities making unlawful demands, the rule was held not to apply.

The House of Lords in an important decision at the end of the 1990s effectively reversed the general principle that no recovery of money could be had, on the basis of a mistake of law.  The House of Lords specifically held that the “mistake of law” exception should be no longer be part of the law of England.  It recognised the general right to recover money paid under a mistake, either of law or of fact.

Mistakes in  Private Contracts

The courts of equity took a less demanding approach to the principle of mistake.  They distinguished between mistakes in relation to the general law, such as common law and statute law and matters of interpretation of agreements and contracts which were regarded as private in nature. A mistake in relation to the interpretation of a private contract could be a basis for setting it aside. It was regarded as a matter of fact, notwithstanding that it was founded on law.

It may happen that an agreement expressed in writing is, in fact, a nullity as where there is a fundamental misunderstanding as to the very nature of the agreement and the subject matter. In this case the contract may be avoided for mistake on general principles.  Where, however, the mistake relates to an aspect of the matter or the agreement’s effect, this is not generally sufficient to avoid the contract under the general principles.

In the limited cases where a relief is allowed for a mistake, the relevant mistake must have occurred at the time the contract was entered into.  This is usually clear. However, if the mistake occurs afterwards, such as may occur when common law and statutes are subject to new interpretation by the courts, it would appear that this has retrospective effect.  The law will be deemed always to have been as later interpreted, notwithstanding that there may have been a settled understanding of what it meant.

Mistakes of Identity

A party to a contract may make a mistake about the identity of the other party. The apparent contract may be void or may be avoided, where that other knew or ought to have known that his identity was critical to the other’s consent to contract.

Where a “con man” appears to be a particular reputable person and the other person contracts with him in reliance on the understanding that he is dealing with that person, the contract may be void. There is no contract.  There may also be a fraudulent misrepresentation, which is a separate further ground to avoid the contact.

There have been a number of cases regarding mistakes as to the identity of the other contracting party. The scenario is that A believes he is selling goods on credit to a person whom he believes to be a particular creditworthy party, B, but who is, in fact, a fraudster, C. Commonly, C then sells the goods to an innocent third-party D. A seeks to reclaim from C. The question is which of two innocent parties A or D suffers the loss.

In some cases, the courts have taken the view that there is no contract because A intends to contract with B and not another person such as C.

An alternative view, which is increasingly preferred, is that C has misrepresented the position, that there is a contract and that the contract may be avoided.  The result is that if the contract has not been avoided before the goods are sold by C to D, then D will get good title, provided that he acts in good faith without knowledge of the fraud.

Identity, Void v Voidable I

Identity can be critical and might be specifically the basis of the sale. Where the offer is made on the basis that the other party is a particular person and he is not that person, the courts have been willing to hold that there is no contract.  In this case, title to the goods concerned (which have been typically obtained by deception) does not pass.  They are therefore recoverable against the third party.

In cases of mistaken identity, a distinction is made between contracts that are void for mistake, in which no title ever passes and contracts that are “voidable” for misrepresentation.  The former contracts are void as and from the outset, whereas the latter are only avoided once positive steps are taken to avoid them. This may take the form of notifying the Gardai.

Identity, Void v Voidable II

Where a party misrepresents his identity for the purpose of obtaining credit, the contract might be void or voidable for mistake or misrepresentation. In the former case, the identity of the supposed counter-party must be such that the other party did not intend to enter a contract with another. There is no contract. In the latter case, the contract is voidable on principles of misrepresentation. The party enters on the basis of a representation as to the other’s identity.

The difference between the above scenarios is important, where a third party has acquired the goods before the innocent party avoids the contract. In the first case, the third party does not obtain the title. It is not necessary to avoid the contract as it is void. In the latter case, the title will pass if the goods are sold to a bona fide third party, without knowledge of the position, before the contract is avoided.

The latter approach has been favoured over the former and courts are disinclined to hold contracts void for mistake as to identity. The Sale of Goods provides that the third party obtains title to the goods in this case, provided that he buys them in good faith without notice of the defect in the title, before the contract has been avoided.

Where a person intends to contract with another and due to some change in the legal structure of the business or change in the personnel of a partnership, that other knows the other party’s intentions, there may be no contract. This may also occur even though the other party was not aware of the mistake as to identity.

References and Sources

Irish Textbooks and Casebooks

Clark, R. Contract Law in Ireland 8th Ed. (2016)

Friel, R. The Law of Contract 2nd Ed, (2000)

McDermott, P.  Contract Law (2001) 2nd Ed (2017)

Enright, M. Principles of Irish Contract Law (2007)

Clark and Clarke Contract Cases and Materials 4th Ed (2008)

English Textbooks and Casebooks

Poole, J. Casebook on contract law. (2014) 12th edition

Stone and Devenney, The Modern Law of Contract 10th Ed (2015)

McKendrick, Contract Law 10th Ed (2013)

Chen-Wishart, Contract Law 5th Ed (2015)

Anson, Reynell, Beatson, J., Burrows, Cartwright, Anson’s law of contract. 29th Ed (2010)

Atiyah and Smith, Atiyah’s introduction to the law of contract. 6th Ed.

Chen-Wishart, M. (2015) Contract law. 5th Ed.

Cheshire, Fifoot and Furmstons, Furmstons and Fifoot Cheshire, Fifoot and Furmston’s law of contract. OUP.

Duxbury, Robert (2011) Contract law. 2nd Ed.

Halson, Roger (2012) Contract law. 2nd Ed.

Koffman & Macdonald’s Law of Contract. 8th Ed. (2014)

O’Sullivan, Hilliard, The law of contract. 6th Ed. (2014)

Peel, and Treitel, The law of contract. 13th Ed. (2011).

Poole, J.Casebook on contract law. 12th Ed. (2014).

Poole, J.  Textbook on contract law. 12th Ed. (2014)

Richards, P Law of contract. 10th Ed. (2011)

Stone, R.  The Modern law of Contract. 10th Ed. (2013)

Treitel, G. H.  An outline of the law of contract. 6th Ed (2014).

Turner, C Unlocking contract law. 4th Ed. (2014).

Upex, R. V., Bennett, G Chuah, J, Davies, F. R. Davies on contract. 10th Ed. (2008).

UK Casebooks

Stone,Devenney, Text, Cases and Materials on Contract Law 3rd Ed (2014)

McKendrick, Contract Law Text, Cases and Materials 6th Ed (2014)

Stone, R, Devenney, J Cunnington, R Text, cases and materials on contract law. 3rd Ed (2014)

Burrows, A. S.  A Casebook on Contract. 4th Ed.

Beale, H. G., Bishop, W. D. and Furmston, M. P. Contract: cases and materials. 5th ed. (2008)

Blackstone’s Statutes on Contract, Tort & Restitution 2017 (Blackstone’s Statute Series)

UK Practitioners Texts

Chitty on Contracts 32nd Edition, 2 Volumes & Supplement (2016)

The above are not necessarily the latest edition.