Part 5: Mistake, Rectification & Misrepresentation

DUHAIME'S CONTRACT LAW: Eight chapters of pure, unadulterated contract law love.

  1. Contract Law - The Introduction
  2. Privity, Consent and the Reasonable Man
  3. Consideration & Deeds
  4. Offer & Acceptance
  5. Mistake, Rectification & Misrepresentation
  6. Restraint of Trade, Assignment, Novation & Frustration
  7. Interpretation of Contracts
  8. Time Limits, Breach & Remedies

MISTAKE

"There is great uncertainty about what the present Anglo-Canadian law of mistake is. No two authors agree in their analysis and the same confusion exists in the case law."
Ontario Law Reform Commission, 1987

A contract requires a meeting of the minds, which Roman law called a consensus ad idem.

If one or both parties have been mistaken about an element of the contract, then there is no consensus ad idem.

But that does not necessarily mean that the contract is void.

Such a rule could breed abuse.

So the common law has tried to develop a fairly sophisticated set of rules for dealing with mistake (see, also, Legal Definition of Mistake) Unfortunately, as with so much of contract law, the final determination of what those rules are is still up in the air, moving with the changing currents of the courts.

In Seppanen v. Seppanen, 59 BCLR (2d) 26, British Columbia's Supreme Court summarized the law by stating:

"In common mistake, both parties make the same mistake. Each knows the intention of the other and accepts it but each is mistaken about some underlying and fundamental fact. In mutual mistake, the parties misunderstand each other and are at cross purposes. In unilateral mistake, only one of the parties is mistaken. The other knows, or must be taken to know, of his mistake."

The court went on to use the example where, for instance, that Alan agrees to buy from Bob a specific picture which Alan believes to be a Picasso but which in fact is a copy. If Bob is ignorant of Alan's erroneous belief, the case is one of mutual mistake. But if he knew of it, it is a unilateral mistake.

When both parties are mistaken on a basic and fundamental element of the contract: the contract is void from the start if the mistake is of such significance that, in the words of English case law, it is a "false and fundamental assumption" of the contract (R. v. Ontario Flue-cured Tobacco Growers', 51 DLR (2d) 7, ONCA, 1965).

For example, if the identity of a contracting party is a fundamental element of the contract, such as an athlete or artist, a mistake in this regard will void the contract. Another example is a contract involving something that, unbeknownst to the parties, has been destroyed.

"Where there is a contract for the sale of specific goods, and the goods without the knowledge of the seller have perished at the time when the contract is made, the contract is void."

§10, B.C. Sale of Goods Act, 1996.

Sometimes, only one party will be in error. If the other party is aware of the misconception or should have been aware of the mistake, the contract may not be enforceable, even if the enlightened party did not cause the mistake. The law books call this a "unilateral mistake."

Mistakes of law would not give rise to judicial interference with a contract. Everyone is presumed to know the law (but see cases like Solle v Butcher, below, and Capital Quality summarized in Chapter 6 of Duhaime's Contract Law).

non est factumOne kind of mistake that give the courts difficulty involves a party who mistakes the kind of contract being signed. Because this type of "mistake" could be abused, it is severely limited by the common law.

There is a legal maxim, non est factum, which means "not his deed" and a special defence in contract law to allow a person to avoid having to respect a contract that she or he signed because of certain reasons such as a mistake as to the kind of contract.

For example, a person who signs away the deed to a house, thinking that the document signed was only a guarantee for another person's debt, might be able to plead non est factum in a court and on that basis get the court to void the contract.

Non est factum cannot be relied upon if the party could have easily have read the contract in question or if the party had a general idea as to the nature and purpose of the contract.

"It will not do for a man to enter into a contract and, when called upon to respond to its obligations, to say that he did not read it when he signed it, or did not know what it contained. If this were permitted, contracts would not be worth the paper on which they are written."

Upton v Tribilcock, 91 US 45 (1875)

The person pleading non est factum would also have to prove that they sincerely believed that the document they thought they were signing was fundamentally different from the one they actually signed. In order to protect the commercial system, the courts have consistently shown that in the presence of a signature by a person endowed with the capacity to contract, non est factum is a very difficult defence to hold in court.

Smith v. Hughes, [1871] 6 QB 597

unilateral mistake not enough

Defendant, a horse trainer, refused to accept a shipment of new oats from plaintiff, saying that the contract had been for "old oats." The plaintiff could recall no such reference.

The court ordered the contract performed because it appeared that the words "old oats" were never used at the moment of "meeting of minds." "There is no legal obligation on the vendor to inform the purchaser that he is under a mistake, not induced by the act of the vendor."

A unilateral mistake does not prevent the acceptance of an offer unless (1) the mistake is as to the terms of the contract (as opposed to motivation) and (2) the mistake is known to the offeree at the time of purported acceptance. Some members of the court were also impressed with the fact that the defendant had been given a sample of the oats which he held in his possession for two days. Mistaken assumptions are immaterial to a contract.

"If, whatever a man's real intention may be, he so conducts himself that a reasonable man would believe that he was assenting to the terms proposed by the other party, and that other party upon that belief enters into a contract with him, the man thus conducting himself would be equally bound as if he had intended to agree to the other party's terms."

Bell v. Lever Brothers Ltd., [1932] AC 161

a heavy onus

A severance payment was made to senior executives of a subsidiary of Lever Brothers Ltd. At the time, Lever Brothers was unaware that the senior executives had been in breach of their fiduciary duties as directors of the subsidiary. They tried to have the court void the severance contract claiming it was paid under a mistake of fact.

"Mistakes as to the quality of the thing contracted for raises ... difficult questions. In such a case a mistake will not affect assent unless it is the mistake of both parties, and as to the existence of some quality which makes the thing without the quality essentially different from the thing as it was believed to be."

But in this case, the court concluded that the "identity of the subject-matter was not destroyed by the mutual mistake." Once a contract has been made, when both parties have agreed with sufficient certainty in the same terms on the same subject matter, then the contract is good unless set aside for failure of a condition precedent or fraud. Neither party can rely on his own mistake even if the mistake was, to his mind, fundamental.

Solle v. Butcher, [1950] 1 KB 671

voidable mistakes under equity

A high rent was given to Solle by Butcher in the mistaken belief, shared by both, that the amount would have been permitted under rent control legislation. Solle later sued Butcher claiming reimbursement of the difference between the control level and the actual rent paid. Butcher counter-claimed asking for rescission which, in the final analysis, the court granted. This case is best known for its extensive review of the law of mistake. The court said that a mistake can be of the kind which renders a contract void from the start or ab initio. These mistakes are the purview of the common law and are to be considered in light of the Lever Brothers decision (see above). Other mistakes are the purview of equity and make a contract voidable if to do so renders no injustice to a third party and if it would be "unconscientious for the other party to avail himself of the legal advantage which he had obtained."

>Unconscientiousness was defined as a mistake induced by a material misrepresentation even though not fraudulent or fundamental, or if one party is aware of the other's mistaken belief and does not correct it. Equity, the court added, can also set aside a contract based on mistake if the "parties were under a common misapprehension either to the facts or as to their relative and respective rights, provided that the misapprehension was fundamental and that the party seeking to set it aside was not himself at fault." In this case, the mutual mistake of fact made the contract voidable and it was consequently rescinded.

Toronto-Dominion Bank v. Fortin, 88 DLR (3d) 232 (1978)

equity, part II

A receiver exceeded his authority by trying to sell a company and during the course of his attempts, he accepted a non refundable deposit of $25,000 from a prospective purchaser. When the purchaser decided to back out of the deal, he negotiated with the receiver and had his deposit reduced to $10,000. When a court later found that the receiver did not have the authority to sell the company, the prospective purchaser claimed the return of the entire deposit, arguing that the money was paid under "a mistake of law."

The court ruled the compromise agreement "though not a nullity at (common) law, is liable to be set aside in equity."

McRae v. Commonwealth Disposals Commission, 84 CLR 377 (HCA, 1951)

Relying on rumours, the Commission sold to McRae the remains of a marooned oil tanker. But there was no tanker at the specified location and, apparently, never had been. McRae sued the Commission for breach of contract and damages. The Commission tried to say that the contract was based on a mistake but the court noted that the Commission:

"... took no steps to verify what they were asserting and any "mistake" that existed was induced by their own culpable conduct. In these circumstances it seems out of the question that they should be able to assert that no contract was concluded."

R. v. Ron Engineering & Construction (Eastern) Ltd., [1981] 1 SCR 111

An error in calculations in the "contract A" of a tender process was held not to invalidate the contract. The contractor intended to submit the figures he submitted right up to and including the moment of submitting the tender, which formed contract A (see summary of facts).

Calgary v. Northern Construction Co.,  67 AR 95 (1986)

snapping it up

An error in calculations was made by a clerk of a tenderer, resulting in a bid $180,000 less than it should have been. It was only after the tender had been selected that the contractor discovered his staff's mistake. But the court found that the error was:

"... to motive and not to terms. The tender sum sent to the city was the term which Northern intended to offer. It decided to offer that term because of a mistake, a mistake which offered it a false reason or motive to make that offer. By the traditional rule, then, the construction contract is enforceable notwithstanding this mistake."

The court then declined to interfere with the contract under equity because it could not find the contract unconscionable as there was no "grossly disproportionate burden upon the tenderer."

Lindsey v. Heron & Co., 64 DLR 92 (ONCA, 1921)

Lindsey offered stock in "Eastern Cafeterias of Canada" to defendant who gave $10.50 each. But when the defendant discovered his mistake (he really wanted "Eastern Cafeterias Limited" stock, a different company), he tried to argue that there was no contract. The court disagreed.

"Judged by any reasonable standard, the words used by the defendants manifested an intention to offer the named price for the thing which the plaintiff proposed to sell, i.e., stock in Eastern Cafeterias of Canada Limited."

Staiman Steel Ltd. v. Commercial & Home Builders Ltd., 76 DLR (3d) 17 (1976)

reasonable man

A purchaser bid for steel at an auction thinking it was a mix of new and used steel, when it was really only used steel. The court said that since the one party thought that the lot included new steel and the other that it did not, that this was a mutual mistake. In these cases,

"... the court must decide what reasonable third parties would infer to be the contract from the words and conduct of the parties. It is only a case where the circumstances are so ambiguous that a reasonable bystander could not infer a common intention that the court will hold that no contract was created. In this case ... a reasonable man would infer the existence of a contract to buy and sell the bulk lot without the building steel and therefore ... there was a contract to that effect binding on both parties, notwithstanding such mutual mistake."

Glasner v. Royal LePage Real Estate,  (BCSC, 1992)

If a party tries to slip in an important amendment....

"...and if the circumstances are such that the amendment might readily be missed, he should be particularly reluctant to assume ... knowledge (of that amendment by the other party)....

"Equity will relieve against performance of a contract obtained by a party who knew the other side was mistaken about a material fact and who took advantage of that mistake."

Lewis v. Averay, [1972] 3 All ER 907

beware the conman

conmanA person managed to con a person selling a vehicle that he was a famous actor and made off with the car leaving a forged cheque in the actor's name. The con-man then sold the vehicle to another unsuspecting man who was looking for a car, this time assuming the identity of his first victim.

The court held that the first contract, though voidable for fraud or mistaken identity, was valid until so voided and the contract stands before third parties who have, in good faith, acquired rights under it. Thus, valid title was conveyed to the second victim and the loss was absorbed by the first victim.

Saunders v. Anglia Building Society, [1969] 1 All ER 1062 (aka Gallie v Lee)

read it!

A plea of non est factum will fail "if the signing of the document was due to his own negligence ... (meaning) carelessness."

For example, failing to read a contract before signing it. As far as the kind of difference required between the document believed in, and the contract in reality, the court said that the difference would have to be "fundamentally ... radically ... or totally different."

Marvco Color Research Ltd. v. Harris, [1982] 2 SCR 774

I said "read it!"

Through no fault of the bank, defendants signed a loan guarantee without reading the document first and relying on the representation of the loan debtor's word that they were only signing an insignificant administrative document. When the bank tried to collect from the defendants, the latter pleaded non est factum.

The court said no. The carelessness of the party requesting non est factum should not be allowed against an innocent third party when it was through his own carelessness that he failed to discover the misrepresentation.

"The party who, by the application of reasonable care, was in a position to avoid a loss to any of the parties, should bear any loss that results when the only alternative available to the courts would be to place the loss upon the innocent appellant."

RECTIFICATION

contract with bandaidIf between the parties, the terms are clear enough, but there has been a drafting error that was not caught before signature, then there is a separate judicial procedure called "rectification" which should be used (although the parties are better off to amend the original contract themselves then pay the cost of judicial rectification).

This would not entail voiding the contract but correcting or amending it under judicial supervision.

Bercovici v. Palmer, 59 DLR (2d) 513 (SKCA, 1966)

nice try

A lawyer's "inexplicable error" extended a conveyance of real property to include a cottage. One of the parties later tried to assert that the inclusion was intended but the trial judge did not believe this evidence and concluded that he was "satisfied beyond any fair and reasonable doubt that the (cottage) was not intended by either party to be included in their transaction."

On appeal, the court added that in cases where rectification is an issue, it is within the purview of the court to consider conduct subsequent to the contract.

Coderre (Wright) v. Coderre, [1975] 2 WWR 193

In this case, the Alberta court  "was not satisfied beyond a reasonable doubt that the agreement alleged by the plaintiff was entered into orally by the parties."

Rectification usually results from a common mistake (when parties share the same mistaken belief in some important element of the contract). But rectification may also be available in circumstances of unilateral mistake if the party "in the know" takes advantage of the mistake "and that the taking advantage of it would amount to fraud or misrepresentation amounting to fraud."

Augdome Corp. v. Gray, [1975] 2 SCR 354

A court can order rectification even if it has not been specifically pleaded. Also, although rectification is not granted when the rights of third parties are affected, this does not apply when the "third parties" are before the court.


MISREPRESENTATION

Misrepresentation is when one of the parties to a contract made a wrong statement about some material element of the contract and, because of this statement, the other party entered into the contract. Contract common law treats fraudulent misrepresentation differently from innocent misrepresentation.

In his book The Law of Contracts in Canada, 1994, p. 295, Professor G. Fridman says there are four conditions that must be met before a court will accept that there has been fraudulent misrepresentation:

"(1) that the representations complained of were made by the wrongdoer to the victim (before the contract); (2) that these representations were false in fact; (3) that the wrongdoer, when he made them, either knew that they were false or made them recklessly without knowing whether they were false or true; and (4) that the victim was thereby induced to enter into the contract in question (a legal presumption exists in this regard)."

Notice that the courts will not entertain a request to rescind a contract if the representation was merely a puffed-up opinion on a particular product. Parties should know better than to give full credence to commercial aggrandizements.

Nor will a misrepresentation on the law be a cause for judicial intervention under this heading, and for the same reasons as given above: everyone is presumed to know the law. Silence can be construed as misrepresentation in certain circumstances.

Redgrave v. Hurd,  20 Ch. D. 1 (1881)

A lawyer agreed to buy a law office from another based on exaggerated representations made on the value of the practice. When the practice proved to be "utterly worthless", the purchasing lawyer sued for rescission of the contract. The court allowed the rescission saying:

"If a man is induced to enter into a contract by a false representation it is not sufficient answer for him to say, "If you had used due diligence you would have found out that the statement was untrue. You had the means ... of discovering its falsity, and did not choose to avail yourselves of them.""

Smith v. Land and House Property Corp., 28 Ch. D. 7 (1884)

A leased property was sold on the representation that the tenant was "a most desirable tenant." Turns out the tenant had been defaulting on his rent and before the deal was closed, actually filed for bankruptcy. The purchaser asked the court to rescind the contract and the court agreed. Where the facts are equally known to both parties, then representations between the parties are mere opinions.

But representations become "material facts" where the facts are not equally known, as was the case in this situation ("statements on a subject as to which prima facie the vendors know everything and the purchasers nothing").

Bank of British Columbia v. Wren Developments Ltd., 38 DLR (3d) 759 (BCSC, 1973)

A corporate secretary renewed a personal guarantee on a company loan on the belief that collateral deposited as security when the guarantee was first signed, was still with the bank as security. It was not, having been released by the bank to the company president.

"When he signed the second guarantee, (defendant) was misled by the words, acts and conduct of the plaintiff into believing that there had been no change in the collateral securities held by the plaintiff, and otherwise he would not have signed it. Defendant is not liable to the plaintiff."

Kupchak v. Dayson Holdings Ltd. Kupchak, 53 DLR (2d) 482 (BCCA, 1965)

Properties were exchanged between the parties including a motel. When the new owner of the motel found out that the stated past earnings of the motel were false, he sued for rescission of the contract. The court found that there was fraud and went on to say that rescission is a equitable remedy and while it is true that a court, under equity, cannot award damages as such, it can order one party to pay compensation to the other. The court preferred to order compensation because the party that had committed the fraud had already made permanent changes to the real property they had acquired by the contract. On the defence of laches, the court stated that this is feasible where:

"... the party has, by his conduct, done that which might fairly be regarded as equivalent to a waiver of it, or where by his conduct and neglect he has, though perhaps not waiving that remedy, yet put the other party in a situation in which it would not be reasonable to place him if the remedy were afterwards to be asserted.... Two circumstances, always important in such cases, are the length of the delay and the nature of the acts done during the interval."

The court denied the defence of laches because several lawyer letters had transpired (in spite of long delays between those letters) and the institution of court action.

Redican v. Nesbitt, [1924] SCR 135

A house was sold without prior inspection. The keys were exchanged for the cheque and when the purchaser saw the property for the first time, ordered a stop-payment on the cheque. The vendor sued for payment and the purchaser defended by suing for rescission.

"Innocent misrepresentation (i.e non-fraudulent but such as renders the subject of sale different in substance from what was contracted for), such as will support a demand for rescission in equity ... will serve as a good equitable defence to a claim for payment under contract as well as afford ground for a counter-claim for rescission."

The court first decided that the property did not differ to that extent from the representations made about it. Considering the circumstances of the case, notwithstanding that the cheque was stopped, the contract was executed (for innocent misrepresentation (i.e. non-fraudulent), rescission is not possible where the contract has been executed).

Heilbut, Symons & Co. v. Buckleton,  [1913] AC 30

A company underwriting a new share offering was contacted by a client and was asked if the new company was "alright." The underwriter replied that "we are bringing it out," from which the client implied a warranty. When the shares did not do well, the client sued based on fraudulent misrepresentation. The court could not find a collateral contract related to the character of the new company.

The courts said these contracts are very rare, will be interpreted strictly and one must show animus contrahendi (i.e. an intention to contract) on the part of all parties to them. In order to succeed, the plaintiff must prove fraudulent misrepresentation "or what is equivalent thereto, must be made recklessly, not caring whether it be true or not."

Dick Bentley Productions Ltd. v. Harold Smith (Motors) Ltd., [1965] 2 All ER 65

Harold sold Dick a car saying that it only had 20,000 miles since major repair. Harold bought the car. Turns out the car had done much more then 20,000 since the last major repair. The court said:

old car"An affirmation at the time of sale is a warranty, provided it appear on evidence to be so intended.... The question whether a warranty was intended depends on the conduct of the parties, on their words and behaviour, rather than on their thoughts. If an intelligent bystander would reasonably infer that a warranty was intended, that would suffice." In this case the representation was made for the purposes of inducing the sale. The court said that it was thus prima facie ground for inferring that the representation was intended as a warranty. It is not necessary to speak of it as "collateral."

The court went on to say that the defendant could rebut this presumption by showing that his representation was innocent. In this case, the vendor made the statements without checking them out and so the representations were not innocent.

Leaf v. International Galleries, [1950] 1 All ER 693

A gallery sold a painting representing it as being done by a famous painter. Five years later, while trying to resell the painting, the purchaser found out that it was not done by that painter.

The vendor honestly believed the identity of the painter to be that which he had represented. The plaintiff sued for rescission of the contract but his claim was denied because for five years he had held on to the painting without rejecting it.

>>> continued  >>> Chapter 6

DUHAIME'S CONTRACT LAW: Eight chapters of pure, unadulterated contract law love.

  1. Contract Law - The Introduction
  2. Privity, Consent and the Reasonable Man
  3. Consideration & Deeds
  4. Offer & Acceptance
  5. Mistake, Rectification & Misrepresentation
  6. Restraint of Trade, Assignment, Novation & Frustration
  7. Interpretation of Contracts
  8. Time Limits, Breach & Remedies

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Published: Monday, May 07, 2007
Last updated: Thursday, October 25, 2012
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