Most Critical Effect of Mistake on Contract

Most Critical Effect of Mistake on Contract

The concept of mistake has a somewhat technical meaning, and what would be considered a mistake by the layman will not always amount to operative mistake. For example, a mistake by one party in the expression of his intention may not be an operative mistake. Errors of judgment are not operative mistakes. So if X buys an asset thinking it is worth $500 when in fact it is worth only $300, the contract is good and X must bear the loss if there has been no misrepresentation by the seller.

Mistake may be one of fact or of law. Section 20 of the Act provides that “when both parties to an agreement are under a mistake (i) as to matter of fact. (ii) Essential to the agreement, the agreement is void.” Three conditions must be satisfied, before a contract can be avoided on the ground of mistake. (i) The mistake mush be of both the parties, i.e. mutual and not unilateral, (i) it must be a mistake of fact and not of law. (iii) It must be about a fact essential to the agreement and not about one which is subsidiary thereto

Types of Mistakes

  • Mistake has to the nature of the transaction. If a person signs a valid contract in the mistaken belief that he is signing a document of a different nature, there will be a mistake which avoids the contract.
  • Mistake by one party as to the identity of the other party.
  • Mistake caused by the negligence of a third party.
  • Mutual Mistake as to the identity of the thing contracted for.
  • Mistake as to any law enforce
  • Mistake as to the value of subject matter of the contract.
  • Mistake as to the existence of a state of affairs forming the basis of the contract. For Example: If X and Y, believing themselves to married, enter into a separation agreement and later learn that they are not validly married, the agreement is void.
  • Common mistake as to the existence of thing contracted far.
  • Mistake as to any law not enforced.

3 Serious Consequences or Effect of Mistake on Contract

The Sec. 20 provides that, when both the parties to an agreement are under a mistake as to a matter of fact essential to the agreement, the agreement is void. But the mistake must be mutual. A contract is not voidable because it was caused by a mistake as to any law enforce, but a mistake as to law not enforce has the same effect as a mistake of fact.

  1. X and Y make a contract grounded on the wrong belief as to law regulating bills of exchange in U.S.A. The contract is void.
  2. X agrees to buy from Y a horse, It turns out that he horse was dead at the time of the bargain, though neither party was aware of the fact. The agreement is void.
  3. X and Y make a contract grounded on the wrong belief that a particular debt is barred by the law of limitation the contract is valid.
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