Description of the legal term Mutual Mistake:
Mutual mistake in British law is a doctrine that addresses errors made by all parties within a contract about a fundamental aspect of that contract. It is a type of mistake that affects the very substance of what is being agreed upon, leading to the possibility that the contract may be declared void ab initio – meaning from the beginning – or voidable – meaning one or more parties may elect to void the contract.
The concept of mutual mistake is rooted in the principle that an agreement must have been reached with a meeting of the minds – consensus ad idem – where all parties fully understand and agree to the contractual terms. When a mutual mistake occurs, it can be argued that this meeting of the minds was never properly established because the parties were mistaken about a basic assumption on which the contract was based.
There are generally three categories of mutual mistake: a common mistake, where both parties make the same mistake; a mutual mistake, where the parties are at cross-purposes; and a unilateral mistake, where only one party is mistaken and the other party is or should be aware of the mistake. The focus here is on the mutual mistake where both parties are mistaken about the same material fact.
For a mutual mistake to lead to a contract being voidable, the mistake must be fundamental to the contract’s terms. A mistake about the value or quality of the subject matter typically does not render a contract voidable, as these are considered errors in judgment rather than substantial mistakes about the nature of what is being contracted.
British courts will generally look at the intention of the parties at the time the contract was made to determine if a mutual mistake occurred. Evidence outside the written contract, known as ‘parol evidence’, can be used to demonstrate that a mutual mistake was made. If it is established that there was a mutual mistake, the court can set the contract aside and the parties may be returned to their original positions as far as possible.
Legal context in which the term Mutual Mistake may be used:
An illustrative case of mutual mistake occurred in the decision of Great Peace Shipping Ltd v Tsavliris Salvage (International) Ltd (2002) where the parties contracted on the misapprehension that a vessel was closer to a casualty than it actually was. Both parties believed that the vessel was within a day’s sailing distance of the stricken vessel, which was crucial to the salvage operation’s success. However, the vessel in question was, in fact, several days away. When this was discovered, the salvor sought to rescind the contract on the basis of a mutual mistake regarding a basic assumption on which their agreement had been made. The court, however, held that despite the mistake, the contract was not voidable since the parties had contracted under written terms that did not make the proximity of the Great Peace a condition of the contract.
Another example is the case of Bell v Lever Brothers Ltd (1932), where both parties were unaware of some material facts relating to the retirement of two employees. Both parties entered an agreement under the mistaken belief that certain conduct had not occurred that, had they known, might have influenced the terms agreed upon. Despite this, the House of Lords found that the mistakes were not related to the fundamental terms of the contract, and as a result, the contract was not voidable.
Understanding mutual mistake is crucial in the formation and interpretation of contracts in British law as it can significantly impact the enforceability of contractual agreements. It ensures that fairness is maintained in commercial transactions by allowing a remedy when both parties have entered an agreement under a shared misunderstanding of important facts. It emphasizes that beyond the written document, the true intentions and understandings of the parties at the time of the contract’s formation are paramount. The doctrine, therefore, plays a crucial role in protecting contractual parties from unjust engagements that could arise from significant errors in their shared assumptions.