Chapter 6 in essence

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1. Where both parties enter a contract under a mistake as to facts or law (but not as to the terms of the contract), which is fundamental (goes to the substance of the contract), the contract is void.

2. The justification for this jurisdiction has been controversial:

  1. the implied condition precedent explanation (ie the parties agreed that no contractual obligations should arise if their common and essential assumptions are untrue) has been rejected in favour of
  2. an explanation based on the impossibility of performance (ie the original contract in the assumed and essential context is ‘impossible’ to perform in the actual context). However,
  3. defective consent may provide a more transparent explanation (ie the actual facts so fundamentally distort the significance or purpose of the contract or the means of achieving the purpose that the parties cannot be said to have given meaningful consent to it).

3. A three-step approach is adopted to determine whether contracts are void for common mistake. Step 1 is to ask whether as a matter of construction the contract has allocated the risk of the mistake to one or other party, or has made the contract conditional on the accuracy of the assumptions which were mistaken, either expressly or impliedly.

4. If not, step 2 is to ask whether the party relying on the mistake was at fault in the sense of inducing the other party’s mistake by its own careless mistake.

5. If not, step 3 is to ask whether the mistaken assumption is fundamental. The following mistakes may (but not necessarily will) be operative:

  1. mistakes as to the existence of the contract’s subject matter;
  2. mistakenly acquiring one’s own property;
  3. mistake as to the essential quality of the contract’s subject matter; and
  4. mistake as to an essential background assumption.

6. The Court of Appeal has rejected an equitable jurisdiction to rescind contracts for common mistaken assumption which was: (i) wider in scope; and (ii) allowed more remedial flexibility than the common law jurisdiction. Great Peace v Tsavliris held that the equitable doctrine lacked authority, contradicted the common law jurisdiction, was uncertain, and was illegitimate in seeking to prevent unfairness. However, good substantive arguments remain for a jurisdiction which allows remedies to be tailored to the seriousness of the mistake, ironically recognised by the same Court of Appeal in calling for legislative reform to inject remedial flexibility.

7. Two kinds of unilateral mistake may void contracts at common law:

  1. A mistake as to identity of the other party (nor merely their attribute)—Contracts are void if one party accepts an offer known not to be intended for them or if they are not identified in the written contract as the other party. Contracts are merely voidable if the identity assumed is non-existent or where the parties deal face-to-face.
  2. A fundamental mistake about the nature or effect of a signed or executed document—Contracts are void by the operation of the non est factum doctrine if the mistaken party is permanently or temporarily unable to understand the document without explanation, is induced or tricked into error, and was not careless in signing the document. There must be a fundamental difference between the document as it is, and as it is believed to be.

8. In three-party cases the current law on mistaken identity and non est factum, based on the void-voidable distinction, fails to openly balance the mistaken party’s defective consent with the innocent third party’s interest in the security of transactions.

9. Equity can rescind a contract or deny specific performance for unilateral mistake where the unmistaken party has engaged in unconscionable conduct or has contributed to the mistake.

10. Equity can also rectify written contracts which fail to record the parties’ common intention as to the terms of contract or, where the mistake is unilateral, if the unmistaken party has engaged in unconscionable conduct.  The greater role given to interpretation of contract has reduced, but not eliminated the importance of rectification.

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