Mistakes in contracts – the judicial approach

Published: 27th September 2007

More than ever before, courts are willing to intervene where contracts are based on a mistake

Connolly v Bellway homes in 2007 demonstrates this clearly. In this case, the court intervened where a deal had been made based on the representation of a fact from one party to the other as part of the negotiations, which the other party did not check.

In looking at the law in this area, it should be noted at the outset that here is a fine line between a party agreeing a terms that are unfavourable and a party being deliberately misled.

Historically, courts have been reluctant to be the arbiter in such situations. In recent years, however, the courts have considered whether there is an implied duty of good faith between parties in the negotiation of a deal.

Broadly, there are three types of "mistake" and we will look at each one in turn:

1. Mutual mistake

To establish this, the mistake must be clear on the document, the correction needed must be clear to the court and, as the name suggests, the mistake must be mutual.

A court will often look beyond the terms of the document (which contains the mistake) in order to construe what the parties actually intended. Of course, the court has no authority to change the deal that has been made

In the 2007 KPMG case, the client drew its solicitor's attention to the omission, from the engrossment lease, of wording which had previously been agreed with the other side. The solicitor did not bring this to the attention of the other side, believing that that omission of the wording in question enhanced the ability of KPMG to exercise its break clause.

The court ruled that the lease was to be interpreted as if the wording which had been omitted had in fact been included. (the wording had appeared in the agreed form of lease attached to the exchanged agreement for lease).

2. Unilateral mistake

Where there is no element of mutuality in the mistake, a four fold test has been set down (in the Thomas Bates Limited case) to determine if there has been a unilateral mistake:

i) party a believes that the document contained a particular provision

ii) party b was aware that it did not and this was due to a mistake by a

iii) b did not draw the mistake to A's attention

iv) the mistake was calculated to benefit b.

If each of these four grounds can be established, the court may deem it inequitable to allow b to resist a rectification claim from a.

This is different from a scenario where one party has simply made a bad deal.

3. Deceit

This was considered in the Bellway Homes Limited case. Here, Bellway completed a deal with Connolly, the owner of development land.

The deal provided for an initial sum to be paid for the land and then further sums on the sale of the units sold off based on the increased value.

The formula that the parties agreed to effect this was erroneous on two counts but, primarily, because the base value for assessing the increase in the units was completely wrong.

The court rejected Connolly's claims for mutual and/or unilateral mistake. The mistake was not mutual as neither party was of the same mind at any time. It could not be a unilateral mistake as there had not been an error of judgement, rather a misunderstanding.

In respect of the claim for deceit, the judge said that there were five requirements:

i) clear false representation of fact / law

ii) fraud by the maker (i.e. Maker knew that the representation was false, or had no belief in it or was reckless as to whether it was true or false)

iii) intention by the maker that the representation should be acted upon by the "victim"

iv) action by the victim in reliance on the representation

v) damage suffered by the victim arising from this.

The case turned on how the base figure came into being. Bellway's agent provided figures of £161-200 PSF which was for the upper end of the scale and intended to apply only to the better quality units.

However, Bellway's representative adopted a figure of £210 in the negotiations, giving the impression that this was comparable to other developments.

Negotiations continued in reliance on this representation and a base figure of £212 was agreed. In court, however, evidence was adduced to demonstrate that a figure of £183 would have been appropriate.

The court said that the proposed base figure of £210 was so far wide of the mark that it could infer dishonesty. Bellway's own board approval papers quoted figure of £170-180. It was held that Bellway's representative had no genuine belief in that the figure was realistic.

Connolly's representative had not investigated the figure put forward but, crucially, this did not defect its claim for deceit as negligence by a victim in relying on a misrepresentation is no defence in deceit.

Accordingly, it is clear that professional representatives need to be careful that hard bargaining on behalf of one's client does not overstep the mark into behaviour likely to entitle the other side to bring a successful claim for deceit. The latter is likely to cost the client (and the professional representative) a great deal more in the long run.