Mistakes can sometimes happen, even in legally binding contracts. Unfortunately, a mistake does not automatically entitle you to terminate a contract or receive a contractual or equitable remedy. However, relief may be available to you depending on the type of mistake you enter.
There are four categories relating to a contractual mistake, namely:
- common mistake;
- mutual mistake;
- unilateral mistake; and
- non est factum.
We take a look at these four categories below and what relief you may seek.
Common Mistake
A common mistake refers to a situation where both parties enter into a contract based on the same factual mistake.
For example, Party A agrees to purchase an original painting by Vincent van Gogh from Party B for $10M. However, after entering an agreement for sale, the parties become aware that the painting is, in fact, a replica as opposed to an original artwork by Vincent van Gogh.
What Can Party A Do?
Party A can claim that the contract was void from the beginning. If a court accepts that a contract is void, the contract will be considered to have no legal force. The courts will not make this declaration lightly. They will only do so in limited circumstances, such as when the parties mistake a fundamental subject matter of the agreement.
However, if the parties only mistake a small aspect of the subject matter of the contract, the court is less likely to deem the contract void. They may instead ‘read the contract down’. Accordingly, the parts of the contract that do not contain the mistake will remain valid.
The court may also refrain from ruling that a contract is void if the party making that claim caused the mistake to arise in the first place. This might be due to their carelessness. In this case, courts will be reluctant to declare a contract void based on one party’s carelessness.
On the other hand, if the party who did not cause the mistake seeks to terminate the contract, they can ask to cancel the contract by seeking the equitable relief of rescission if other contractual remedies are not available or appropriate. Rescission is a way of terminating a contract that aims to restore the parties to their positions before they had entered the contract.
Mutual Mistake
A mutual mistake will occur when both parties to the contract are mistaken but about different things.
For example, Party A agrees to purchase Party B’s car. However, Party A believes that they are buying Party B’s Rolls-Royce, whilst Party B believes that they are selling their Ford Fiesta. Party A and Party B are both unaware of the error and are mutually mistaken as to the other’s intention.
This is pretty uncommon, and the legal position on how to resolve it is unclear. Sometimes rather than this being considered a ‘mistake’, a court may find that there is no binding agreement due to the lack of certainty and contractual terms being too vague or uncertain.
Where a mutual mistake occurs, either Party A or Party B may seek a declaration from the court that the contract be deemed void. The courts will only accept this claim in circumstances where the mutual mistake is fundamental in nature. Alternatively, rescission of the contract may be appropriate where the terms of the contract are unenforceable due to uncertainty or vagueness.
This type of mistake could also be treated as two separate unilateral mistakes, as discussed below.
Continue reading this article below the formUnilateral Mistake
Unilateral mistakes are very common. A unilateral mistake will occur when only one party to the contract is mistaken, and the other party is aware of (or should be aware of) the mistake.
For example, Party A contracts with Party B. However, Party A mistakenly believes that they are contracting with Party C. Party B is aware of this mistake but does not inform Party A of their error.
In such cases, the court may grant rescission of the contract or an order for parties to rectify it. Whilst rescission aims to return the parties back to the original position before the contract, rectification is where the court orders that a change be made to a contract so that it reflects what the parties originally intended.
Depending on the circumstances, the mistaken party may also be able to claim misleading and deceptive conduct and have other rights and remedies under the Australian Consumer Law.
Non est Factum
Finally, a party can claim non est factum, which translates to ‘not my deed’, if they had no real understanding of the character or effect of the contract. Although a contract will bind a party whether or not they have read or understood its terms, an exception to that rule arises when the signing party can demonstrate that they did not understand the fundamental nature or function of the document through no fault or neglect of their own.
For example, suppose Party A is illiterate and signs a document with Party B, believing it to be an agreement to hire Party B’s car. However, it is, in fact, an agreement to purchase Party B’s car. In that case, Party A can plead non est factum to have the contract deemed void.
Originally, the non est factum plea was limited to only those who were illiterate and only in relation to deeds. However, over time, courts have made the plea available to other types of documents as well as those who are blind, illiterate or rely on others for advice on what they are signing. In these limited circumstances, the court may declare a contract void.
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Key Takeaways
Mistakes can happen when entering into an agreement with another business. There are four categories relating to a contractual mistake, namely:
- common mistake;
- mutual mistake;
- unilateral mistake; and
- non est factum.
If you believe your business has mistakenly entered a contract, our experienced contract lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
If you are the innocent party who did not cause the mistake, you may have the option to rescind or terminate the contract. However, it depends on the circumstances and the type of mistake.
It is quite difficult to exit an agreement once both parties sign it. This is why it is important to be careful in deciding to agree to something. There are exceptional circumstances where it may be possible to terminate the contract if you did not understand the fundamental nature of the document. However, such circumstances cannot be due to your own fault or negligence.
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