September 2006

Contractual Mistakes

The consequences for both parties

Too frequently people commit themselves to “bad” agreements without giving sufficient thought to (and taking appropriate advice about) the consequences of such agreements. In these cases, one of the only options available to achieve some sense of fairness is to apply to the Court under the Contractual Mistakes Act.

The purpose of the Contractual Mistakes Act “is to mitigate the arbitrary effects of mistakes on contracts” by allowing the Court to grant relief in appropriate situations.

In a recent case:

  • S owned adjacent vacant sections (Lots 1&2) for which plans existed to build a unit on each lot.
  • S was interested in purchasing a property (which had a price of $630,000) from B.
  • S asked whether B would accept cash plus a trade (mentioning the vacant land);
  • S showed B the plans for the units; B’s agent inspected the Lots and assessed them at $300,000.
  • B’s employee drew up an agreement for $300,000 plus the trade BUT mistakenly omitted Lot 2 from the agreement, which was signed by B without further checking.
  • S’s solicitor identified that the agreement was only for Lot 1 but S then signed the agreement anyway.
  • Settlement occurred; only later did B realise that only Lot 1 was acquired;
  • S stated that he only intended to sell Lot 1 and assumed that B had decided to accede to that intention.
  • The Court held:

(1) At the time S signed the agreement S realised that B had made a serious error but decided to sign the agreement as it stood;

(2) Relief for B was available, under the Contractual Mistakes Act, because:

(a) B calculated throughout on receiving both Lots and B’s mistake was known to S;

(b) B’s mistake resulted, at the time of the agreement, in a substantially unequal exchange of values.

(3) Accordingly, the contract was varied to include Lot 2.

If S had been up front, at the time, S would not have become embroiled in the costs of a Court case that S eventually lost. Further, if B had checked the agreement properly before signing no Court case would have been necessary in the first place.

The Act is a useful backup for righting wrongs. But, better still, know what you are agreeing to first so that you do not need to rely on the provisions of the Act.