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Dealing with Mistakes in Contracts

Thursday, 3 July 2014

What happens if you make a one-off order for a large amount of capital goods and someone gets the measurements wrong?

The French national railway operator SNCF has found that it can mean finding an extra 50m Euros to sort out the problem. SNCF ordered hundreds of trains that were too big to fit into many stations after it failed to verify measurements provided by network operator RFF.

In certain circumstances the English courts can apply the legal doctrine of mistake in contract law. Unfortunately the law of mistake is unlikely to be helpful in a case similar to that of SNCF unless the other contracting parties knew about it beforehand.

The Law of Mistake

Under the doctrine of mistake the courts can set aside a contract that has been entered into on the basis of a mistake but only in certain circumstances and when it is fundamental to the contract.

The three types of mistake for the purposes of English law are as follows:

1. Common Mistakes

2. Mutual Mistakes

3. Unilateral Mistakes

Common mistakes are mistakes that both parties have made and where there is agreement that a mistake existed when they entered into the contract. The mistake can relate to the existence of the subject matter of the contract, title in property referred to in the contract or mistakes about the obligations in the contract that mean they are impossible to perform. The contract becomes effectively void at common law.

Mutual mistakes are mistakes that have led to a misunderstanding on the part of both parties such that they are at cross purposes. In these circumstances the courts consider that the parties did not consent to the formation of the contract in question. This might occur where there is ambiguity about what the contract actually means such that it cannot be enforced.

Unilateral mistakes are where one party makes a mistake and the other party is aware of that mistake, or is taken to be aware of it, and takes advantage of the mistake when forming a contract. In this case the courts view that the consent of the mistaken party was not given when entering the contract meaning that the contract was not properly formed. It is therefore void at common law.

Undoing Your Mistakes

As can be seen, the circumstances in which mistakes will enable parties to escape contracts are limited and are only available if the mistake is fundamental to its operation. Mistakes along the lines of the one made by SNCF are unlikely to qualify.

Parties that have made a mistake in a contract should seek legal advice to see what options are available. If the contract is yet to be performed, negotiating with the other party can be the most cost effective option but legal advice should still be sought. For specialist advice contact Peter Gourri today by email or telephone 0207 611 4848.

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