Mistake (contract law)

In contract law, a mistake is an erroneous belief, at contracting, that certain facts are true. It can be argued as a defence, 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'. It is important to note the distinction between the 'common mistake' and the 'mutual mistake'.

Unilateral mistakes

Contract law
Part of the common law series
Contract formation
Offer and acceptance · Mailbox rule Mirror image rule · Invitation to treat Firm offer · Consideration
Defenses against formation
Lack of capacity Duress · Undue influence Illusory promise · Statute of frauds Non est factum
Contract interpretation
Parol evidence rule Contract of adhesion Integration clause Contra proferentem
Excuses for non-performance
Mistake · Misrepresentation Frustration of purpose · Impossibility Impracticability · Illegality Unclean hands · Unconscionability Accord and satisfaction
Rights of third parties
Privity of contract Assignment · Delegation Novation · Third party beneficiary
Breach of contract
Anticipatory repudiation · Cover Exclusion clause · Efficient breach Deviation · Fundamental breach
Remedies
Specific performance Liquidated damages Penal damages · Rescission
Quasi-contractual obligations
Promissory estoppel Quantum meruit
Related areas of law
Conflict of laws · Commercial law
Other common law areas
Tort law · Property law Wills, trusts and estates Criminal law · Evidence
v · d · e

A unilateral mistake is where only one party to a contract is mistaken as to the terms or subject-matter contained in a contract. This kind of mistake is more common than other types of mistake. One must first distinguish between mechanical calculations and business error when looking at unilateral mistake. 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.

Conversely, when a party is guilty of an error in business judgment, there is no relief.

Leading British cases on unilateral mistake are Smith v Hughes^{[Case 1]} and Hartog v Colin & Shields.^{[Case 2]} There are situations, such as in the contracting and subcontracting contexts, where a subcontractor provides a bid that would not seem reasonable in the context of industry norms. Similar to Donovan v. RRL Corp.,^{[Case 3]} if a person sees an advertisement and there is a mistake that a person reading the newspaper would believe to be a valid offer and there is sufficient reliance on the offer, then it is unlikely that a court will rescind the contract. In the case of Donovan, the error in the newspaper was not the fault of the car dealer. The mistake was made on the part of the newspaper company that printed the error. This would be more of an example of a mutual mistake. Both the buyer (Donovan) and seller (RRL Corp.) mistakenly believed that the advertisement was correct. As is discussed in the mutual mistake section on this page, most likely a court will excuse each of a duty to perform the contract. Mutual mistake theory will also discuss the factors that will determine the allocation of risk in the event of a mutual mistake. The test to determine the allocation of risk is as follows: A defendant should bear the risk of the mistake if: (i) the agreement allocated the risk to the defendant; (ii) the defendant was aware of having limited knowledge with respect to the facts to which the mistake related but treats his limited knowledge as sufficient; or (iii) the court finds that it is reasonable under the circumstances to allocate the risk to the defendant. Given the facts in Donovan, who is in the better position to bear the risk? The car dealer who provides the advertisement? Or the consumer? Many jurisdictions would claim that the car dealer has more knowledge in this regard than a consumer. A consumer, generally, will not be aware of errors in an advertisement nearly as often as a commercial seller of goods who is in the business of advertising their own products to the public at large.

As any area of law, any doctrine has its exceptions. In Speckel v. Perkins,^{[Case 4]} there was a unilateral mistake by one of the parties. However, the mistake should have been apparent to a reasonable person in the position of the party who did not make the mistake. The court determined that the offer of US$50000 was, on its face, clearly a mistake. The correct amount, as both parties were aware, was for US$15000. The question raises, at what point will the unilateral mistake become so apparent that it leaves unilateral mistake theory and enters into mutual mistake doctrine?

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^{[Case 5]} 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 Ltd v Hudson^{[Case 6]} is now the leading UK case on mistake as to identity [2003] UKHL 62. 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 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 be 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. Who has the risk contractually? Who bears the risk by custom? Restatement (Second) Contracts Sec. 154 deals with this scenario.

This is easily confused with mutual assent cases such as Raffles v Wichelhaus.^{[Case 7]}

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.

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.^{[Case 8]} 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,^{[Case 9]} 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 Salvage (International) Ltd.^{[Case 10]}

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 American 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. Roswell State Bank v. Lawrence Walker Cotton Co., 56 N.M. 107, 240 P.2d 143 (1952):

‘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^{[Law 1]}).

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, 12 A.2d 66 (1940), 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. 56 N.M. at 114.

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.’

Union Bank & Trust Co.v. Girard Trust Co.

Union Bank & Trust Co.v. Girard Trust Co., 307 Pa. 468, 500-501, 161 A.2d 865 (1932).

A firm processing information in order to transfer title using 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 law governing record-keeping mistakes and how they are corrected has been gathered by the U.S. Court of International Trade in Hynix Semiconductor America, Inc. v. United States, 414 F. Supp. 2d 1317 (C.I.T. 2006), in which the Court was faced with application of a tariff which had been calculated at the wrong rate by a customs clerk. To enforce "anti-dumping" legislation and keep 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 the 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. § 1820(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 …” Id. at 1319.

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],” 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.” Id. at 855) Hynix, 414 F. Supp. 2d. at 1325.

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.” Id. at 1326; G & R Produce Co, v. U.S., 281 F. Supp. 2d 1323, 1331 (2003); Prosegur, Inc. v. U.S., 140 F. Supp. 2d 1370, 1378 (2001); Universal Cooperatives, Inc. v. United States, 715 F. Supp. 1113, 1114 (1989).

‘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.

See also

• Mistake in English law, for a discussion of the subject more focused on English contract law

Notes

1. ^ Uniform Fiduciaries Act (1923, as amended), then §§ 36-101 and 106 (1941), now §§ 46-1-1 (B) and 46-1-5 NMSA (1978).

1. ^ Smith v Hughes (1871) LR 6 QB 597.
2. ^ Hartog v Colin & Shields [1939] 3 All ER 566.
3. ^ Donovan v. RRL Corp., 27 P.2d 702 (Cal. 2001).
4. ^ Speckel v. Perkins, 364 N.W.2d 890 (Minn. Ct. App. 1985).
5. ^ Lewis v Avery [1971] 3 All ER 907.
6. ^ Shogun Finance Ltd v Hudson [2003] UKHL 62.
7. ^ Raffles v Wichelhaus (1864) 2 Hurl & C 906 Court of Exchequer.
8. ^ Bell v Lever Brothers Ltd [1932] AC 161.
9. ^ Solle v Butcher 1950 1 KB 671.
10. ^ Great Peace Shipping Ltd v Tsavliris Salvage (International) Ltd 2003 QB 679.