Mistakes can sometimes happen. It’s unfortunate when you make a mistake regarding a legally binding contract. Although, a mistake does not automatically entitle you to quit your contract or receive a contractual or equitable remedy.
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 they may offer.
A common mistake refers to a situation where both parties enter into that contract based on the same mistake. For example, Party A agrees to purchase from Party B an original painting by van Gogh for $10M. After entering into a contract for sale, the parties become aware that a fire had in fact destroyed the van Gogh painting before they entered into the contract.
What can Party A do?
Under common law, Party A can claim that the contract is void ab initio. If a court accepts that a contract is void ab initio, the contract will be considered invalid from the beginning and will have no legal force. The courts will not make this declaration lightly and will only do so in limited circumstances. For example, parties are mistaken in their belief as to the existence of the subject matter in a contract. However, a court will not declare a contract void, if the mistake arose due to one party’s carelessness, and that party is seeking to void the contract.
Alternatively, Party A could claim equitable relief in the form of rescission. Rescission is an equitable remedy which aims to restore the parties to their positions before they entered into the contract. The wronged party can elect to rescind a contract. It is a discretionary remedy, and the court will only make orders on terms that would do justice between the parties.
A mutual mistake will occur when both parties to the contract are mistaken as to the other’s intention. For example, Party A agrees to purchase Party B’s car. However, Party A believes that they are buying Party B’s Rolls-Royce, but 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.
Either Party A or Party B may seek a declaration from the court under common law that the contract is void ab initio. The courts will only declare a contract void ab initio in circumstances where the mutual mistake is fundamental in nature.
Either Party A or Party B may seek an equitable remedy of rescission as discussed above in relation to common mistake. 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.
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 in fact contracting with Party C. Party B is aware of this mistake but does not inform Party A.
The courts will not generally declare a contract void ab initio for unilateral mistake under the common law. As such, a party will more commonly seek an equitable remedy. The courts in equity will generally require some improper conduct before granting equitable relief (i.e. the unmistaken party in some way prevents the mistaken party from becoming aware of their mistake). The courts may grant rescission of the contract as discussed above, or alternatively, an order for rectification. Rectification is an equitable remedy where the court orders that a change be made to a written contract. In essence, that change seeks to reflect what the parties intended to contract.
Often in these circumstances, the mistaken party may claim misleading and deceptive conduct which may give rise to separate remedies under the Australian Consumer Law.
Non est Factum
A contract will bind a party whether or not they have read and/or understood its terms. One exception to that rule is where the person who has signed the contract can demonstrate that they did not understand the fundamental nature of the document they signed. In the legal world, this is known as non est factum. The term ‘non est factum’ translated means ‘not my deed’.
Reliance on a plea of non est factum was originally limited to people who were illiterate and only in relation to deeds. Over time, the courts have expanded the use of non est factum to include other documents being signed by persons who are blind, illiterate or those that rely on others for advice as to what they are signing. In these limited circumstances, the court may declare a contract void.
Whatever your mistake, it is advisable to seek an expert legal opinion as to your rights and obligations as soon as you become aware of the mistake. You may be able to set aside your contract, or some other equitable relief may be available to you. If you have any questions or need advice on your contractual issues, get in touch with our contract lawyers on 1300 544 755.