Relief for Mistake at Common Law I
At common law, rescission is automatic and the contract is void. Restitution may apply in order to reset the pre-contract position. The equitable remedy is more tailored to the injustice, so that a court order is more likely to be required.
A party to a contract the subject of an operative mistake may rely on the common law or equitable position. It might be more attractive to rely on the common law position because the result is clear; there is and was no contract. In contrast, where the mistake is operative in equity only, the remedy may be on terms that seek to do justice.
Equity appears to allow a slightly broader concept of mistake. The substantive equitable position prevails over the common law position, where the common law is more restrictive. The English courts have sought to reverse earlier decisions allowing for a wider concept of mistake in equity.
Relief for Mistake at Common Law II
Damages are available for a mistake, only where there is a warranty, fraudulent or negligent misrepresentations. Not all categories of negligent misrepresentation qualify for damages. There may be a right to indemnity for expenditure incurred.
In cases of mutual mistake where there is no contract, rescission as such does not arise. Restitution of the effects of a change of position or a transmission of funds, etc may be required. The non-existence of a contract will usually mean there is a total failure of consideration, allowing full restitution of sums paid.
Equitable Relief from Mistake
The courts of equity were formerly separate courts which were merged into the common law courts over 140 years ago. Equitable rules prevail over legal rules. The principles of equity take a wider view of the types of mistake that may be operative (and accordingly have legal consequences).
The equitable principles of relief for mistake have appeared to be more liberal than that at common law. Different formulations of words have been used but cases show that the mistake need not be as serious and as fundamental as at common law. Nonetheless, the misapprehension must relate to something important and the party seeking to rely on it must not be at fault.
The UK Court of Appeal has questioned whether the substantive grounds for relief in equity are broader at common law than at equity. It has indicated that the substantive grounds should be no wider. The equitable remedies remain more flexible than the common law remedies.
Equitable relief may be available where there has been a mistake, whether of the type sufficient to avoid the contract at common law or in the slightly wider class of contract that may be avoided in equity.
Rescission is an equitable remedy which provides for the unwinding of a contract. The remedy of rescission causes the contract to be is avoided and unwound. Rescission may be granted on terms and conditions to remediate the injustice or inequity.
In contrast to the common law, rescission in equity which is wider in scope is a matter for the courts’ discretion. It is not automatically available. Accordingly, a court declaration is usually required.
Rescission may be allowed where there has been a common mistake, a mutual mistake or a unilateral mistake.
In the case of a voidable contract where a person has disappeared, typically taking and not paying for goods on the basis of a representation, rescission is effected by notifying the police.
Nature of Equitable Relief
In equity, if the mistake is fundamental and serious, the court may grant equitable remedies, including the rescission of the contract. If the parties are under a common misapprehension as to fundamental facts or their respective rights, it may be inequitable to enforce the agreement. The party seeking to set-aside the agreement must not be at fault.
In equity, a contract is avoided is not void from the outset. It can only be avoided if it is possible to do so without unfairly affecting steps that have been taken in reliance on it, in the meantime. In exercising its equitable discretionary powers, the courts may set aside an agreement, even though the mistake is not sufficiently fundamental so as to render it void at common law.
In some cases where there has been a mistake in the contract, the court will not set it aside but will alter it on conditions that are fair and reasonable. Where one party knew that the other party was mistaken, then the contract may be set aside on terms and conditions or may be corrected. This may happen, for example, where there is an obvious mistake as to price.
An important feature of equitable relief for mistake is that the relief is not retrospective. The contract is voidable and so is avoided only from the date of rescission
Source of Mistake May be Relevant in Equity
How the mistake has come about may be relevant to the availability of equitable relief. If one party has created the mistake or misapprehension, it may be unjust to allow him to force the contract terms on the other party. Conversely, if it turns out that the bargain is more advantageous to the other party, then he may be compelled to perform.
If the party seeking to uphold and enforce a bargain, knows that the other party did not intend to enter the apparent bargain, he may not be permitted to enforce it on the other party.
The issue comes up in the context of a specific performance. Specific performance may be refused even where there is a breach of contract. Specific performance is a discretionary remedy and the court will have regard to the conduct of both parties before making an order for specific performance.
Mistake a Basis for Refusal of Equitable Remedy
It may be unconscionable to enforce a contract that is valid under common law and the court may grant or refuse an equitable remedy.
Specific performance is an order compelling the performance of the contract. In some cases, the courts may refuse to grant specific performance on the grounds of the defendant’s mistake on discretionary grounds, where the mistake is not sufficiently serious to render the contract void or avoidable.
The courts may grant an order of rectification for the correction of a written contract. The parties make a mistake in putting an oral agreement into writing. The court may be prepared to grant the equitable remedy of rectifications to correct the error.
Where there is a mistake which would justify rectification, rescission may be granted in lieu of rectification. In other cases, the court may rectify the document and enforce the rectified bargain. It will not rectify where its effect would be to bind a party to a contract which he did not assent.
Limits to Equitable Concept of Mistake
The equitable principles do not relieve bad bargains. The equitable rules, like the legal rules, are confined within narrow limits. Apparent contracts will generally be enforced. This reflects the principle of “buyer beware” in the context of contracts.
In the vast majority of cases, the courts will uphold the bargain made. The fact that one party receives more or less than he subjectively “bargained for” or expected, does not preclude enforcement. If a third party observing the offer and acceptance would believe that an agreement has been entered, there is a contract. If there is no correspondence between the offer and acceptance, there is a contract.
Many contracts are entered because one party thinks the subject matter is worth more than the other believes it to be worth. This is the essence of the allocation of commercial risks.
A mistake in relation to the effect of the contract terms is not generally sufficient to avoid a contract. Each party must look after his own interests. He must take his own advice regarding the legal effects of the agreement. This is not the other party’s risk.
Limits to Remedies
Relief in equity for mistake, although wider than that allowed at common law, is narrow. It cannot be used to relieve a party of a foolish or bad bargain. The fact that something is worth substantially less than first appeared for reasons unknown to the party is not of itself, a sufficient ground to avoid the contract. Courts are not disposed to letting parties out of a contract, simply because it has become unprofitable.
The equitable remedy of rescission may be barred in certain circumstances. It becomes too late to rescind, if it is not possible to reinstate the original pre-contract status. This is mitigated where, for example, the inability to rescind and unwind is due to the fault of the party against whom it is sought.
Specific performance may be refused in circumstances which are not enough to rescind the contract itself. Specific performance is a discretionary remedy. The courts may grant relief against an honest mistake, where specific performance would impose an unreasonable burden.
Damages are not generally available for mistake. There must be a fraudulent or negligent representation or a breach of contractual warranty before damages are awarded.
Relief for Unilateral Mistake
The courts may grant relief against unilateral mistake based on equitable principles of unconscionability. If one party misleads another into signing a contract by causing him to believe it will have a particular effect, when it in fact and law has another effect, the courts may refuse to enforce it on equitable principles.
If one party is aware that the other has made a serious mistake about the nature and content of a contract, even one comprised in a document, and the former deliberately seeks to ensure that the latter does not become aware of the true position, the courts of equity may refuse enforcement. This may apply where a party engages in a deliberate course of conduct designed to inhibit discovery.
The principle may apply, even if the former does not have precise knowledge of the other party’s mistake. However, the principle will not allow a party to get out of a bad bargain. The exception to the general rule is relatively narrow. It does not oblige a party to disclose facts contrary to his interests. There must be an element of unconscionable conduct on the part of one party.
Where the terms of the contract are not properly recorded in writing, it may be possible to rectify or correct the written document by incorporating the correct terms of the prior verbal agreement into the written document. This is difficult to do unless there is clear proof.
Rectification may be granted where the agreement reached is not reflected in the deed or the document giving effect to it. This is an equitable relief or remedy which corrects the deed or document.
In cases where a person misstates who he is, the courts do not generally avoid the contract for mistake. Where the contract has been freely entered in relation to an agreed subject matter, the identity of a party is not usually a critical issue.
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).
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.