6.3 Mistake

The parties to a contract can ordinarily not get out of the contract by reference to having made a ‘mistake’ in entering into the contract – mistakes in the general sense of the word are not enough to void a contract. However, the law recognises certain specific categories of mistakes, and a mistake falling into one of those categories may affect the validity of a contract in various ways. It is therefore necessary to draw several distinctions.

First, as alluded to, we must distinguish between those types of mistake that have legal consequences and those that do not. Second, a distinction must be drawn between a mistake of law and a mistake of fact. Third, a distinction must be drawn between three different forms of mistakes of fact; that is, ‘common mistake’, ‘mutual mistake’ and ‘unilateral mistake’.^[1][Missing Footnote in original]

6.3.1 Mistake of fact

6.3.1.1 Common mistake

Where the parties to a contract are mistaken about the one and same fact – so as to share a common mistaken belief – a common mistake occurs. Where that mistake relates to a fundamental term of the contract, the contract will be void ab initio (i.e., from the beginning) under common law. What amounts to a fundamental term may vary from one contract to another, but may, for example, include the subject matter of the contract.

The most typical situation in which a common mistake occurs is where the parties to a contract mistakenly believe that a certain subject-matter exists. For example, in Scott v Coulson,^[2] a contract was entered into under which a life insurance policy was issued. Neither of the parties knew that the assured was in fact already deceased at the time of contracting. Here, the common mistake clearly related to a fundamental term of the contract. However, a rather strict interpretation has been applied in relation to what constitutes a “fundamental term”.

In Leaf v International Galleries,^[3] the mistake was not said to relate to a fundamental term.  The matter before the Court involved the plaintiff purchasing a painting of Salisbury Cathedral that both he and the seller thought to have been painted by a particular well-known artist (Constable). Years later, when the plaintiff sought to sell the painting, it was discovered that in fact it was not a painting by Constable. The Court noted that:

There was a mistake about the quality of the subject-matter, because both parties believed the picture to be a Constable; and that mistake was in one sense essential or fundamental. But such a mistake does not avoid the contract: there was no mistake at all about the subject-matter of the sale. It was a specific picture, ‘Salisbury Cathedral’. The parties were agreed in the same terms on the same subject-matter, and that is sufficient to make a contract.^[4]

In the light of this decision, great care must be taken in evaluating whether a common mistake truly relates to a fundamental term or not.

The effect of equity in this area of law is well illustrated in Solle v Butcher.^[5] The case related to a seven-year lease of an apartment. At the time of the contract, both parties were under the impression that the relevant Rent Restriction Act did not affect the apartment. However, it turned out that the apartment was subject to rent restrictions, and the lessee sought to rely on the restrictions to pay a substantially lower rent than agreed upon. It was held that there was no common mistake as to a fundamental term:

The parties agreed in the same terms on the same subject matter. It is true that the landlord was under a mistake which was to him fundamental … but, whether it was his own mistake or a mistake common to both him and the tenant, it is not a ground for saying that the lease was from the beginning a nullity.^[6]

At the same time, however, Denning LJ also noted that, where a contract was good, or at least not void, at common law, “the court of equity would often relieve a party from the consequences of his own mistake, so long as it could do so without injustice to third parties”.^[7]The order given by the Court illustrates the flexibility of equity, and can best be described as holding the contract conditionally voidable; that is, the lease was to be interrupted and then continued at the higher rent originally agreed upon.

The application of Article 4 of Rule 11 is illustrated in McRae v Commonwealth Disposal Commission.^[8], In that case, the plaintiff had purchased a wrecked tanker said to be positioned at a specific reef. In actual fact, there was no tanker stranded at the specified position. The Court held that, as the plaintiff’s belief as to the tanker’s existence was induced by the defendant, there was no common mistake, and the case was therefore distinguishable from Scott v Coulson.

A party relying on a common mistake must have reasonable grounds for its mistaken belief.^[9]  In Associated Japanese Bank (International) Ltd v Credit du Nord SA,^[10] B had sold 4 machines to the plaintiff bank (“AJB”), who then leased them back to B.  The defendant bank (“CDN”) contracted with AJB in terms under which CDN guaranteed B’s lease payments on the machines.  The machines in fact did not exist.  So, when B defaulted and AJB brought action against CDN for the lease payments, CDN successfully claimed, in its defence, that it had entered the contract of guarantee under a mistake as to the subject matter of the contract.  The existence of the machines was fundamental to the contract, since they constituted the prime security for CDN as guarantor.  This meant that the subject matter of the contract actually entered into between the two banks was essentially different from that which they reasonably believed it to be.  Therefore, the contract was void ab initio for common mistake.

The law relating to common mistake was further clarified in Great Peace Shipping Ltd v Tsavliris Salvage (International) Ltd.^[11] The defendants offered salvage services to a vessel which had suffered serious structural damage. Negotiations between the defendants and the claimants resulted in a hire contract for a minimum of five days to escort and stand by the damaged vessel for the purpose of saving life. The agreement contained a cancellation clause giving a right to cancel on payment of five days’ hire. It was subsequently discovered that the vessels were in fact 410 miles apart, not 35 miles as previously understood. The defendants cancelled the contract with the claimants and refused to make any payment for the hire of their vessel. The claimants brought an action for breach of contract. The defendants disputed the claim on the ground that the purported contract had been concluded by reason of a fundamental mistake of fact.

In dismissing the appeal, the Court concluded that, the issue in relation to common mistake turned on whether the mistake as to the distance between the two vessels had the effect that the services that the claimants’ vessel was in a position to provide were essentially different from what the parties had agreed. The fact that the defendants did not cancel the agreement with the claimants until they knew whether they could get a nearer vessel to assist indicated that the mistake did not have that effect. Performance of the contract had not been impossible and, having entered into a binding contract, which they were expressly entitled to cancel subject to the obligation to pay the agreed fee, the defendants were liable to pay the cancellation fee. The Court also noted that:

Mistakes have relevance in the law of contract in a number of different circumstances. They may prevent the mutuality of agreement that is necessary for the formation of a contract … Whether two parties have entered into a contract in this way must be judged objectively, having regard to all the material facts.^[12]

This is a useful reminder of the link between the law’s approach to mistakes and the need for a genuine ‘meeting of the minds’ and certainty for a contract to be formed.

In addition to the rules of common law and equity discussed so far, one statutory provision should also be noted in the context of common mistake. Sale of Goods Act 1896 (Qld), s. 9 states that: “When there is a contract for the sale of specific goods, and the goods without the knowledge of the seller have perished at the time when the contract is made, the contract is void”, thereby giving statutory expression for a part of the common law principles outlined above.

6.3.1.2 Mutual mistake

A mutual mistake is different to a common mistake in that, in the former, the parties do not share a common mistaken belief as they do in the latter. In the case of a mutual mistake, while the parties are mistaken as to the same fact, they are of different views.

A situation of mutual mistake arose in Raffles v Wichelhaus.^[13] The parties had contracted for certain goods to be delivered in England on a ship called ‘Peerless’, sailing from Bombay. However, it turned out that there were two ships called ‘Peerless’ sailing from Bombay to England but arriving at different times. The buyer had believed that the goods would be delivered by one ship, and the seller had believed that the goods were to be delivered by the other ship. Therefore, there was no meeting of the minds, and as both possibilities were equally likely under the circumstances, it could not be said that a reasonable person would have recognised a contract to have been formed.

In Raffles v Wichelhaus,^[14] the Court noted that “It would be a question for the jury whether both parties meant the same ship called the ‘Peerless’”,^[15] thereby hinting at the objectiveness of the test establishing whether a mutual mistake has occurred or not.

The application of this objective test is exemplified in W. & J. Sharp v Thomson,^[16] where the parties had contracted for a quantity of crockery, which was described as “50 crates Wedgwood Seconds in Pearl White and C. C. as per list”, to be delivered in instalments of 5 crates each. It turned out that there were two possible manufacturers of “Wedgwood Seconds” and Griffith C.J. noted that:

If it appeared that the plaintiff W. Sharp thought that he was buying goods of some value, and corresponding in kind to the specimens shown to him, while the defendants intended to sell to the plaintiffs crates of such assorted rubbish as was tendered, then the parties would not have been ad idem. But the defendants’ manager himself says that that was not his intention. What, then, did he mean? I cannot find any ground for holding that their agent, by whom the order was obtained, meant anything else than what the plaintiff W. Sharp says he himself understood by the written order—that is, goods of the same kind as the specimens shown to him. The defendants ratified their agent’s action by finally accepting the order. In my opinion there was a valid contract, and a breach of it, and the ordinary consequences must follow.^[17]

Therefore, in some cases, where the description of the item within a contract creates ambiguity in relation to that item, the item contracted for may be identified by extrinsic evidence and the mentioned objective test so as to reach the conclusion that no mutual mistake occurred.

Relatedly, the High Court, in Slee v Warke,^[18] found that where there was a mutual mistake between parties to a contract, that contract could be rectified, providing that a common intention of both parties to provide a term in the contract, which was omitted, could be established by reference to prior dealings.

In Pukallus v Cameron,^[19] the High Court of Australia considered the terms of a contract whereby a parcel of land had been sold by Mr. Cameron to Mr. and Mrs. Pukallus.  Both parties to the contract had mistakenly believed that the land subject to the sale agreement included within it a bore and a 27-acre plot of cultivated land. The High Court did not dispute the trial judge’s finding of mutual mistake, contributed to by innocent misrepresentation of the respondent. However, it held that the trial judge’s order for rectification of the contract, to include the bore and the cultivated area, could not be upheld because there was no clear intention common to both parties that the bore and cultivated land were to be included in the sale.  The subject of the mistake related to where the boundary of the land should lie, not the nature of the land to be sold; and the terms of the contract clearly indicated the number of acres to be sold, which was not in dispute.

A distinction between the concept of mutual mistake and the doctrine of frustration was drawn in Codelfa Construction Pty Ltd v State Rail Authority.^[20] Mutual mistake occurs where a common contractual assumption is of present fact; where the assumption is of future fact, it is a case of frustration.  The distinction between the two is that, in the former, the contract is void ab initio; in the latter, the contract is binding until falsified.

6.3.1.3 Unilateral mistake

Unilateral mistakes are similar to mutual mistakes in that the parties do not share a common mistaken belief. However, in situations of unilateral mistakes, only one party is mistaken, while the other party is not. For example, while one party, A, is mistaken as to what the other party, B, intends to contract for, party B is well aware of what party A intends to contract for.

Situations of unilateral mistake ordinarily arise either in relation to the content of the contract, or in relation to the identity of the other contractual party. These two situations are discussed separately below, but Rule 13 is equally applicable to both types of unilateral mistake.

While Taylor v Johnson^[21] (see below) arguably makes its application uncertain, Smith v Hughes^[22] is an example of a unilateral mistake relating to the content of the contract. In that case, the buyer thought that he was purchasing old oats, while the seller intended to sell new oats. The buyer refused to accept delivery of the oats and the Court discussed the case as a matter of unilateral mistake. It was held that, in order for the contract to be held void, the buyer had to show that:

1) he intended to buy old oats;

2) he thought that the seller intended to sell old oats;

3) the seller knew that he thought that the seller was offering old oats for sale; and

4) the seller knew that he wanted to buy old oats.

Obviously, satisfying such an evidentiary burden will often be difficult.

Article 2 of Rule 13 stems from the High Court’s decision in Taylor v Johnson.^[23]  The matter before the Court involved a contract for sale of land at the price of $15,000. The buyer argued that the amount $15,000 was the total price, while the seller had thought of that as the price per acre (making the total purchase price approximately $150,000). The buyer claimed specific performance and the seller sought an order setting aside the contract. In the majority opinion, the Court was careful to limit the scope of its conclusion:

The particular proposition of law which we see as appropriate and adequate for disposing of the present appeal may be narrowly stated. It is that a party who has entered into a written contract under a serious mistake about its contents in relation to a fundamental term will be entitled in equity to an order rescinding the contract if the other party is aware that circumstances exist which indicate that the first party is entering the contract under some serious mistake or misapprehension about either the content or subject matter of that term and deliberately sets out to ensure that the first party does not become aware of the existence of his mistake or misapprehension.^[24]

Identifying the subject matter of a contract claimed to be void at law, or voidable in equity, may raise difficult questions.^[25]  Bell v Lever Brothers^[26] was a case in which the defendant company (“Levers”) had contracted with B and S to serve as chairman and vice-chairman, respectively, on the board of another company (“Niger”), of which Levers held more than 99 per cent share.  B and S were successful in turning around Niger’s previously flagging performance but, in the course of so doing, B and S also indulged in a number of breaches of their respective fiduciary duties to both Levers and Niger.  Due to unforeseen circumstances, Levers had to cut short B’s and S’s contracts. By way of compensation for such early termination, Levers paid out 30,000l and 20,000l to B and S respectively.  Levers then sought to recover these payments after their respective breaches were discovered, some two months later, arguing that the money was paid under a mistake of fact.

Unfortunately, Levers’ ground was unilateral mistake, requiring them to establish fraudulent misrepresentations on the part of B and S in relation to their breaches.  The jury in fact found no fraud but, rather, that B and S had concealed or innocently misrepresented their position in respect of the breaches.  This may have allowed the respondent company to make a claim based on mutual mistake. However, such amendment to their pleading was held not to be allowed; and, in any case, were mutual mistake pleaded, the mistake would have related not to the subject matter of the termination agreement, but to the quality of B’s and S’s respective service contracts, which was not a fundamental term in the termination agreement.

In those situations where the unilateral mistake relates to the identity of the other party to the contract, the question of whether the mistake relates to “a fundamental term of the contract” is determined by reference to whether the mistaken party entered into the contract with an intention to contract only with the person it mistakenly believed it was contracting with. If that is the case, the contract is void. If not, the contract is unaffected by the rules of mistake (but can, of course, still fall within the scope of e.g., misrepresentation and/or fraud).

In Lewis v Averay,^[27] the plaintiff advertised a car for sale, and sold it to a person claiming to be a well-known actor. The facts indicate that the only reason why the buyer’s identity was an issue was that the payment was by cheque and that the buyer wanted to take immediate possession of the car. In other words, the identity of the buyer does not appear to have been of relevance for the seller’s decision as to whom the car was to be sold, but only in the context of securing payment. The Court noted that:

When a dealing is had between a seller … and a person who is actually there present before him, then the presumption in law is that there is a contract, even though there is a fraudulent impersonation by the buyer representing himself as a different man than he is. There is a contract made with the very person there, who is present in person. It is liable no doubt to be avoided for fraud, but it is still a good contract under which title will pass unless and until it is avoided.^[28]

Boulton v Jones^[29] is an interesting contrast to Lewis v Averay,^[30] though the case is different in that the parties did not meet in person, and thereby no presumption arose that the contract was concluded between the parties present. In Boulton v Jones,^[31] a party was allowed to get out of its contractual obligations due to the fact that he did not intend to contract with the other party. The facts were as follows: unknown to Jones, Boulton had taken over a business previously run by Brocklehurst. Jones was used to dealing with Brocklehurst and had a set-off against Brocklehurst. Jones entered into a contract with the mentioned business. Boulton, who knew that Jones intended to contract with Brocklehurst, supplied the goods without notifying Jones of the change to ownership.

6.3.1.4 Non est factum

In Petelin v Cullen,^[32] Petelin, who could not read English, signed a document thinking that it was a receipt for money received, when in fact it was an extension of an option to purchase land. He later refused to sell the land under the extended option and met an action for specific performance with the defence of non est factum (‘it is not my deed’). In outlining to whom the defence extends, the Court noted that:

The class of persons who can avail themselves of the defence is limited. It is available to those who are unable to read owing to blindness or illiteracy and who must rely on others for advice as to what they are signing; it is also available to those who through no fault of their own are unable to have any understanding of the purport of a particular document. To make out the defence a defendant must show that he signed the document in the belief that it was radically different from what it was in fact and that, at least as against innocent persons, his failure to read and understand it was not due to carelessness on his part. Finally, it is accepted that there is a heavy onus on a defendant who seeks to establish the defence.^[33]

Further, the Court stated that the “carelessness” discussed referred to “a mere failure to take reasonable precautions in ascertaining the character of a document before signing it”.^[34] This illustrates how Australian courts will apply the maxim of non est factum. However, the requirement that the signed document be “fundamentally, radically or totally different in character” is to be strongly emphasised.

In Saunders v Anglia Building Society,^[35] an elderly lady, Saunders, who at the relevant time had broken her glasses, was informed that she was signing her house over to her nephew. However, she was in fact signing it over to her nephew’s business associate (Lee) who was the person in front of her, who told her to what the contract related.

As Lee later defaulted, a third party sought to take possession of the house. Saunders sought an order that the deed of gift of the house to Lee was void. However, the House of Lords concluded that whether the gift of the house was made to her nephew or Lee did not make the deed she signed fundamentally different to the deed she thought she was signing.  The Court’s conclusion that, the deed was a deed regardless of whom it was made in favour of, may be factually correct. However, the judgment nevertheless seems harsh when one considers that the plaintiff in the matter ended up transferring ownership of her house (what typically is a person’s most valuable asset) to the wrong person.

6.3.1.5 Rectification

Rectification is an equitable remedy that may be ordered where the parties make a mistake in reducing a contract to writing. There are two situations in which rectification may be of relevance: common mistake and unilateral mistake. Rule 15 outlines the principles of rectification governing common mistake.

The rules regulating rectification in relation to common mistake can be illustrated by reference to Commerce Consolidated Pty Ltd v Johnstone.^[36] In that case, the parties had agreed that interest was to be paid from 1 May 1974. However, when the agreement was written down, a mistake was made, and the written contract stated that interest was to be paid from 1 May 1975. The Court held that the contract was to be rectified to indicate the date agreed by the parties.

While these rules are rather straightforward, difficulties arise in the context of satisfying the burden of proof. As is made clear in Article 2 of Rule 15, the party seeking rectification must show, in clear and precise terms, what were the parties’ actual final intentions, as well as that the written contract does not embody the parties’ final intentions.

As far as rectification of unilateral mistakes is concerned, the relevant principles can be described as follows:

The Australian approach to rectification of unilateral mistakes is outlined in Leibler v Air New Zealand.^[37] In that case, Isi Leibler was the Managing Director and majority shareholder of a large travel agency, Jetset Travel and Technology Pty Ltd (“Jetset”), who had traded for many years with Air New Zealand (“A.N.Z”).  A.N.Z. entered into an agreement to purchase one-half of the shares in Jetset and the agreement was subject a clause that, if Leibler or A.N.Z. later sold their shares, they would offer the shares to the other holder first.  More specifically, the shares were not to be offered for sale to a competitor of the other holder.  This clause was omitted from the final contract, in error, without A.N.Z.’s knowledge; and A.N.Z. sought rectification of the contract on the basis that Leibler knew about the deletion and deliberately refrained from drawing the mistake to A.N.Z.’s attention. In upholding the rectification order by the trial judge, the Court observed that:

If (1) one party, A, makes an agreement under a misapprehension that the agreement contains a particular provision which the agreement does not in fact contain; and (2) the other party, B, knows of the omission and that it is due to a mistake on A’s part; and (3) lets A remain under the misapprehension and concludes the agreement on the mistaken basis in circumstances where equity would require B to take some step or steps … to bring the mistake to A’s attention; then (4) B will be precluded from relying upon A’s execution of the agreement to resist A’s claim for rectification to give effect to A’s intention.^[38]

While Rule 16 is similar to Rule 13, outlining the common law rules of unilateral mistake, several differences should be observed. First, while the unilateral mistake rules of common law make the contract void, the rules of rectification are far more flexible; the court can order that the contract be rectified or rescinded. Second, while the unilateral mistake rules of common law focus on mistakes as to fundamental terms only, the situations covered by rectification of unilateral mistakes appears to expand on what the mistake may relate to (i.e., not only conditions).

Finally, Club Cape Schanck Resort Company Ltd v Cape Country Club Pty Ltd^[39] discussed situations where the parties’ common intention cannot be ascertained or achieved. The dispute related to an agreement between the Resort and Country Club was made whereby the Country Club would maintain and operate a self-contained “sewage treatment plant” and reticulation system. The Resort entered into a “Supply Service Agreement” with the Country Club and agreed to pay fees to the Country Club to cover the costs of providing a “sewage treatment service”. The current case arose when the Resort claimed the Country Club had charged excessive fees in breach of the agreement. The Court noted that:

since the equitable doctrine of rectification exists for the purpose, in effect, of ordering actually or notionally the textual amendment of a document, it will not be available to achieve the amendment of a particular document just because the document is shown not to conform with a common intention of the parties to it. It must be shown further that words or expressions or other text inserted into or deleted from the document would give effect to the common intention … So much I take to be axiomatic: it has never been the office of a decree of rectification to offer, as a kind of simulacrum, the nearest alternative to the thing to which the parties actually agreed.^[40]

6.3.2 Mistake of law

Money paid under a mistake of law is prima facie recoverable much the same as money paid under a mistake of facts. In David Securities Pty Ltd v Commonwealth Bank of Australia,^[41] the appellants entered into a foreign currency loan agreement with the Commonwealth Bank and suffered financial losses due to adverse fluctuations in exchange rates. Thus, they claimed damages against the bank and the accountants who gave the advice concerning the loan. The bank counter-claimed for recovery of moneys due under the loan. The Court held that the money was recoverable when the payer mistakenly believed that she/he was under a legal obligation to pay or that the payee was legally entitled to the payment.

Further, mistake caused by ignorance or erroneous belief may also suffice. However, the claim for restitution may be defeated if the payee can point to that the payment was made for good consideration, or that the payee has acted to her/his detriment upon receipt of the payment, or that the payment was made in compromise of an honest claim.

The Court applied these principles in Co-Buchong v Citigroup Pty Ltd (“Co-Buchong”),^[42] where the defence of change of position was argued by second defendant bank (NAB) against cross-claim of restitution by first respondent bank (Citibank).  Both banks had acted on fraudulent instructions in transferring sums of money in respect of the Applicant’s accounts.  Citibank had first transferred US$500,000 to NAB and NAB had subsequently transferred US$465,090 to accounts at another bank.

In State Bank of New South Wales v Swiss Bank Corporation (“State Bank”),^[43] the Court of Appeal relied on David Securities in considering the defence of change of position, saying that the person claiming the defence (State Bank) would need to show that it paid away the money “on the faith of receipt.”  The defence failed in that case because State Bank did not satisfy the criteria laid down to show “faith of receipt.”  In the somewhat more recent decision of Perpetual Trustees Australia Ltd v Heperu Pty Ltd (“Herperu”),^[44] the Court of Appeal explained that a defendant may be shown to have acted on the faith of receipt if there is a “foundation of information obtained in connection with the receipt to justify acting on the basis of the receipt.”  Herperu was accordingly applied in Co-Buchong because, in Co-Buchong, NAB paid out money from the applicant’s account on the basis of information in a SWIFT communication from Citibank, which NAB recognised as a valid receipt of funds available for disbursement at the behest of the applicant.

An example of an unsuccessful claim for restitution of monies paid under mistake of law is found in the High Court decision in Roxborough v Rothmans of Pall Mall Australia Ltd.^[45] David Securities was applied, and distinguished; in that case, monies paid under terms of a contract between the parties were not recoverable, merely because the contract had referenced invalid tobacco licensing legislation in calculating the amounts to be paid.  That the legislation had been rendered invalid did not make the parties’ contract, or any part of it, invalid because of any mistake as to the constitutional validity of the legislation.