Contract law

Mistake (contract law)

In contract law a mistake is an erroneous belief, at contracting, that certain facts are true. It may be used as grounds to invalidate the agreement. Common law has identified two different types of mistake in contract: "unilateral mistake" and "mutual mistake," sometimes called "common mistake."

Unilateral mistakes

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, or something like that). 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 cases on unilateral mistake are Smith v. Hughes [1871] and Hartog v. Colin & Shields [1939] 3 All E.R. 566.

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 [1971] 3 All ER 907 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 v Hudson (2004) is now the leading UK case on mistake as to identity. 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 but about the same material fact within their contract. They are at cross-purposes. As such, there is no consensus ad idem, and this overlaps with the objective theory of contract, and there is no offer and acceptance. Hence the contract is void. Collateral mistakes will not afford the right of rescission. A collateral mistake is one that 'does not go to the heart' of the contract, so to speak. For a mutual mistake to be void, then the item the parties are mistaken about must be material (emphasis added).

Raffles v. Wichelhaus 2 H. & C. 906 (Ex. 1864)

(PLEASE NOTE: Many contract professors prefer to use this case to display "misunderstanding". Misunderstanding is a different legal term of art than Mutual Mistake. Whereas Mutual Mistake is predicated on the same factual error relied on by both parties, misunderstanding occurs when a term of the contract is interpreted in two separate ways by the parties.)

Plaintiff Raffles agreed to sell 127 bales of Indian cotton at 17 pence per pound to Defendant Wichelhaus with payment to be made within a specified time after the arrival of the cotton in Liverpool, England. The parties’ agreement provided that the cotton was “to arrive ex Peerless from Bombay.” However, there were two different ships named “Peerless” regularly sailing from Bombay to England, one leaving in October and the other in December. Plaintiff Raffles shipped the cotton on the December Peerless, and defendant Wichelhaus refused to accept the cotton. Raffles sued on the alleged contract. Wichelhaus argued that it understood the shipment would be shipped on the October Peerless. Raffles argued that it was immaterial which Peerless was used, “so long as it was a ship called the ‘Peerless.’” Plaintiff also argued that the words “to arrive ex Peerless” only meant that if the vessel were lost on the voyage, the contract was ended. Holding for the defendant Wichelhaus, the court concluded there was “no binding contract.” Since the parties meant different ships, “there was no consensus ad idem.”

The buyer agreed to purchase cotton from the seller. The parties agreed the cotton would be shipped on the ship “Peerless.” Unknown to the parties, there were two ships Peerless. Buyer knew of October Peerless and expected the cotton to be shipped on October Peerless. But Seller knew of December Peerless and shipped the cotton on December Peerless. Buyer refused to accept the shipment when it arrived later than Buyer expected, and Seller sued. The court held there was no contract since “there was no consensus ad idem.” (No agreement as to the matter.)

Mutual mistakes are rare, but they do occur. If there is a true mutual mistake, there is no contract, even though it may be said there was a meeting of the minds.

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. 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, 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.

    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 principal 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.
    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 (1923, as amended), then §§ 36-101 and 106 (1941), now §§ 46-1-1 (B) and 46-1-5 NMSA (1978). Roswell was the case of first impression on this issue in 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., 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.
    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 fpr 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.

    Unilateral Mistake (one party in error, other party silent)
    Mutual Mistake or Honest Mistake (both parties in error)
    Decisional Mistake (matter of law)
    Ignorant Mistake (matter of fact)
    Conspiracy Member (only with guilty knowledge)
    Materiality (the mistake must make a difference)

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