A question which is sometimes asked, and rightly so, is what is mistake in contract?
Commonly understood, a mistake in the real world is where someone has done something they didn't intend to do, or thought something was right when it was actually wrong.
This latter mistake, as to the truth of something, is the kind of legal mistake people can also make in contracts.
There are three kinds of mistake.
The first is common mistake: both parties to a contract each believe the same thing about the subject matter of a contract is true, when really it is false. An example is McCrae v Commonwealth Disposals Commission (1951) 84 CLR 377 in which the High Court of Australia held that: where a party represented to another that a sunken oil tanker existed, believing it did, and, naturally, the other party also believed this, that if the tanker did not in fact exist, both parties had made the same mistake.
This is contrasted against the second kind of mistake, mutual mistake. A mutual mistake is where both parties are mistaken about different things. A good example is the case of Raffles v Wichelhaus (1864) 159 ER 375 where the mistake concerned a shipment of cotton. The contract stated the cotton was to be shipped on the "Peerless" leaving Bombay. The problem was that there were two ships named "Peerless" both leaving Bombay carrying cotton: one in October and the other in December. The buyer thought the shipment was the October one, while the seller was thinking of the December one. Of course, the court held they were both mistaken but about different things, that being which shipment the contract was speaking of.
In common and mutual mistake the problem is that as a result of the mistake, the court cannot objectively determine what the contract was about, or rather, what the parties agreed to do. Unless the court can do so, there can be no contract in existence. Hence if there is a mistake about what was being contracted for, then there could never have been any agreement, and thus never any contract. In which case the contract is void ab initio, or void from the beginning. In other words, in the eyes of the law the contract never existed.
The third kind of mistake however, is completely different from the other two, which is where the confusion reigns.
The third kind is known as a unilateral mistake. It covers situations where only one party to the contract is mistaken about something regarding its subject matter. This is not all that is required though (if it was then pretty much anyone could get out of a contract). What is needed is for the other party who is not mistaken to:
a) know the other party is operating under a mistake; and
b) set out to profit from it by not correcting the mistaken party.
Taylor v Johnson (1983) 151 CLR 422 is an oft cited example. Johnson granted Taylor the option to purchase two lots of land, at 5 acres, for $15,000. Unfortunately Johnson was under the mistaken belief that she was selling the lots for $15,000 an acre, thus bringing the total price to $150,000. Taylor knew of Johnson's mistake and sought to take advantage by having a court order Johnson to specifically perform the contract. In other words, to complete the sale at the much lower price. As astute readers would have already concluded, Johnson won and did not have to sell the land at the much cheaper price.
In cases of unilateral mistake, the contract is merely voidable, which means the mistaken party may elect to rescind or continue the contract. If they choose to rescind then the contract will be treated as though it were void unless an innocent third party has gained rights in property the subject of the voidable contract. Thus where a pawnbroker innocently acquired title to a ring that was procured by another person misrepresenting themselves to a jeweler, that jeweler could not get the ring back from the pawnbroker: Phillips v Brooks [1919] 2 KB 243.
The reason for this difference of void and voidable as between cases of common and mutual mistake versus unilateral mistake is as follows.
Common and mutual mistake concerns the fact of whether there was any actual agreement, or meeting of the minds, to begin with.
Unilateral mistake though, is informed by considerations such as unconscionability, which is why there is a concern to protect innocent third parties and try to arrive at the fairest result possible for everyone.
There is of course much more to all of this, but as a primer on a confusing area of law, I trust you'll find it helpful.
