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ADMS 2610 (100)
Chapter

ADMS 2610 Chapter Notes -Life Insurance, Rescission, Money Laundering


Department
Administrative Studies
Course Code
ADMS 2610
Professor
Robert Levine

Page:
of 5
UNDERSTANDING THE CONCEPT OF MISTAKE
Any attempt to understand the concept of Mistake in contract law is made quite
difficult by both text writers and a reading of decided cases. This is because both
sometimes talk about there being a contract, but one party wants it set aside, suggesting a
contract exists and is voidable; and at other times, they talk about a problem with the
subject matter of the contract which has the effect of creating no contract at all, so the
contract is void. In the first situation, the suggestion is that a contract exists, but it will be
set aside by reason of mistake (making it voidable), while in the second situation, what
they are trying to say is that, because there was some problem or mistake concerning the
subject matter of the contract, there never was a contract at all, and thus, the contract is
void ab initio or from the outset or start. The result is that it appears that there is no
consensus or agreement on what mistake actually is. However, if you read the case law
carefully, what becomes apparent is that with the exception of Public Policy or a specific
statute which renders/makes a contract void, the only time a contract is void from the
beginning is by reason of one type of Mistake which will be discussed below. Thus, for
your purposes, whenever you encounter Mistake, you can consider the contract void or
voidable depending on the nature of the mistake.
THE TYPES OF MISTAKE
MUTUAL MISTAKE:
The first type of mistake is what is often called a Common or Mutual Mistake:
that is a mistake made by both parties to the contract, usually having to do with the
subject matter of the contract or the consideration for it. In such a situation you can
consider the contract void. Consider the following examples:
1. A and B are negotiating the sale by A to B of A’s stamp collection. Both A and B
believe that it is an ordinary stamp collection with a value somewhere around $
5,000.00, so they agree on a price of $ 4,700.00, while unknown to either of them,
the collection contains a stamp worth $ 100,000.00, making the stamp collection
really worth $105,000.00. Here, A would be able to set aside the contract,
because there really was no contract at all. That is: both parties were mistaken as
to the true nature/value of the collection; or in other words, both parties were
mistaken as to the subject matter of the contract and thus the contract is void.
2. A and B are negotiating the purchase by B of shares in a company. A says to B,
“ What will you give me for 75 shares of Eastern Cafeterias of Canada.” and B
replies “I shall look into it and let you know.” After making some inquiries, B
telephones A back and says, “I will give you $ 10.50 a share for your Eastern
Cafeterias” and A replies, “ I accept your offer.” Later B says that he made a
mistake and meant to buy shares of a company called Eastern Cafeterias Limited.
What B is trying to argue is that he and A were never in agreement about the
company whose shares A was selling and B was buying. A court, however,
would likely hold that there was no mistake: B agreed to buy the shares that A
was offering for sale i.e. Shares in Eastern Cafeterias of Canada.
What is important here is the principle that both parties have to be of the same
mind and agree upon the subject matter of the contract (there must be a
consensus ad idem) or else there will be mistake.
3. A and B are negotiating the purchase by A of B’s 1998 Honda Civic car.
Eventually, they agree on a price of $ 3,500.00 and B pays it. However, unknown
to both A and B at the time of the negotiations and before agreeing on the price so
as to form a contract, the car is demolished by a tractor trailor which plows into it.
In this case, both parties are mistaken about the existence of the subject matter of
the contract, namely the existence of an undamaged 1998 Honda Civic car.
Hence the contract is void (although a court would say that B can set the contract
aside).
UNILATERAL MISTAKE
NORMAL UNILATERAL MISTAKE:
While Mutual Mistake requires a mistake made by both parties to a contract at the
time of its formation, Unilateral Mistake is different and requires only one party to be
mistaken or to make a mistake.
There are two types of Unilateral Mistake. For want of a better description, the first type
can be called a normal Unilateral Mistake and it has two requirements. The first is that
one party makes an innocent mistake about either the subject matter of the contract or
something related to the contract. The second requirement is that the other party knows
that the innocent party has made a mistake (and is taking advantage of it). If both
requirements are met, the contract will be considered voidable at the option of the
innocent party. Consider the following examples:
1. Let us revisit the first example of the stamp collection given under Mutual
Mistake. Now in this case, assume that A does not know that there is a stamp in
the collection worth $ 100,000.00, but B does and regardless of this knowledge,
takes advantage of A by agreeing to a price of $ 5,000.00 for the collection.
Later, however, A finds out the truth about the $100,000.00 stamp. In this case, A
will succeed in setting the contract aside, because of his unilateral mistake, since
the law will not allow B to take advantage of A. In essence, there was never an
agreement as to the true subject matter of the contract or in other words, there
was no consensus ad idem, and the contract is voidable at the option or request
of A.
2. A offers to sell his 1958 antique Corvette Stingray car to B for $ 65,000.00, which
is the approximate value of the car. However, when A sends a written offer to B,
instead of $ 65,000.00, he writes $ 6,500.00 and B who knows the value of the car
is around $ 65,000.00, realizes that A has made a mistake, but accepts the offer
taking advantage of A. Here a court would find that A has made a unilateral
mistake, because it is somewhat obvious, and at A’s rquest would set aside the
contract. In other words the contract would be voidable.
3. Same example as number 2, however, this time A sends an offer of $55,000.00
instead of $ 65,000.00 and when B accepts it, A takes the position that he has
made a unilateral mistake. In order to determine whether there is a contract, you
look at the difference between the approximate value of the subject matter and the
allegedly mistaken offer. In this case, unlike the first example, the difference
between $ 65,000.00 (the intended offer) and $ 55,000.00 (the actual offer made)
is not significant. Thus, a court would probably find that there was no real mistake
made by A at all (i.e. the contract is not voidable), since B could assume that $
55,000.00 was within the range of price of an antique Corvette Stingray.
NOTE: Examples are given in your text of situations in which there is a call for tenders
and one company submits a tender which is accepted and then alleges that it made a
unilateral mistake. Here, as in examples 2 and 3 above under Unilateral Mistake, you
look to the approximate value of the job or contract, and if there is a great or
substantial difference in the tender price and the job/contract price or price range for
the job/contract, then most likely the argument of mistake will succeed. However, if
there is only a small or slight difference between the tender price and the actual price
or price range for the job/contract, an argument of unilateral mistake will not succeed.
UNILATERAL MISTAKE AS TO IDENTITY
The second type of unilateral mistake is commonly referred to as Unilateral
Mistake as to Identity. In this situation, one party wants to contract with a specific
individual or entity, such as a company. However, someone else represents themselves
as the individual or entity in question and, by doing so, is committing the tort of deceit or
fraud. Thus, the innocent party is misled into believing that the other party is the person
or entity he/she intends to contract with. That is, the innocent party makes a unilateral
mistake as to identity. Consider the following example:
1. A owns a very valuable painting, but needs money. So he decides to sell the
painting to B, a renowned collector of valuable paintings, because A believes
from having researched B, that B will take very good care of the painting. A
contacts B by phone and offers to sell B his painting for 1 million dollars. B
accepts A’s offer, because the price is somewhat low, and they arrange that B will
come by on Friday at 12 o’clock noon to pay A and pick up the painting. B, who
is a very wealthy man, has a servant, Mary, who overhears B’s conversation with
A. Realizing that the price B is going to pay is low and that if she were to buy
A’s painting, she could sell it for twice as much (i.e. 2 million dollars), Mary
contacts her boyfriend, Fred, a money launderer, and Mary and Fred arrange that
Fred will show up at A’s place a half hour before B is supposed to arrive, pretend