Contracts are meant to provide certainty and clarity. But what happens when a genuine mistake is made before or at the time of entering into the agreement? Can a party walk away from the deal, or is the contract still binding?
In this article, our contract lawyers explore the key types of contractual mistakes, the legal principles involved, and when a mistake can provide grounds to escape a deal.
Key Takeaways
- Under the objective theory, contracts affected by mistake are voidable only, meaning they remain valid until formally rescinded
- Unilateral mistakes where one party knows of the other’s error can render contracts voidable in equity, particularly where the knowing party takes advantage of the mistake
- Common mistakes about fundamental subject matter may make contracts void, but simple errors in judgment or value do not typically provide grounds for avoidance
- The distinction between mutual, unilateral, and common mistakes determines the available remedies and legal consequences
- Rectification may be available where written contracts fail to reflect the true agreement between parties due to mistake
Understanding Mistakes in Contract Law
A mistake in contract law refers to an incorrect belief held by one or both parties at the time of forming the contract.
Not every mistake allows a party to avoid a deal – courts in Australia carefully distinguish between types of mistakes and their legal consequences.
Under the objective theory, courts focus on what was communicated and agreed upon, not merely what one party believed. The key question is whether the mistake affects the very foundation of the agreement.
For a deeper dive into the foundational aspects of contract formation, check out our article on What Is Acceptance in Contract Law?
Types of Mistakes in Contract Law
Australian law classifies contractual mistakes into three main categories: common, mutual, and unilateral. Understanding these distinctions is crucial for assessing whether a contract can be challenged or set aside.
Common Mistake
A common mistake occurs when both parties share the same incorrect belief about a fundamental aspect of the agreement – for example, selling goods that were unknowingly destroyed before the contract was formed.
Legal tip: If the mistake goes to the core of the contract, it may be void at common law.
Mutual Mistake
A mutual mistake happens when each party misunderstands the other’s intentions – so there is no “meeting of the minds.”
If the misunderstanding is severe enough to prevent genuine agreement, Australian courts may declare the contract void for uncertainty.
Unilateral Mistake
A unilateral mistake arises when only one party is mistaken about a key term, and the other party knows or ought to know of that mistake.
Contracts affected by unilateral mistake can be voidable in equity, especially where the non-mistaken party acts unconscionably by exploiting the error.
Legal Remedies for Mistakes
Where a mistake impacts the validity or substance of a contract, several legal remedies may be available under Australian law:
1. Rescission
Rescission sets aside the contract and restores both parties to their pre-contract position.
In equity, if one party induces or knowingly exploits another’s mistake, the court may allow rescission.
2. Rectification
Rectification corrects a written agreement that fails to reflect the true intentions of the parties.
To succeed, the applicant must show:
There was a common continuing intention between the parties; and
There is a discrepancy between that intention and the written document.
The court may then amend the document to match the parties’ actual agreement.
3. Damages
While damages are uncommon in pure mistake cases, compensation may be available where the mistake overlaps with misrepresentation or misleading conduct under the Australian Consumer Law.
However, rescission may not be granted if the contract has been affirmed after the mistake was discovered.
To understand how to legally adjust contractual terms, see our guide on How to Vary a Contract Legally.
Limitations and Defences
Australian courts are cautious about interfering with freely negotiated contracts. Not all errors qualify for relief.
The objective theory prioritises commercial certainty. This means:
Simple errors in judgment or value do not invalidate a contract.
Parties are expected to exercise due diligence before signing.
A mistake must relate to the fundamental nature of the agreement, not just its commercial advantage.
Case Study: Taylor v Johnson
In Taylor v Johnson (1983) 151 CLR 422, Mrs Johnson agreed to sell land for $15,000, mistakenly believing the price was $15,000 per acre ($150,000 total).
Mr Taylor realised her error, stayed silent, and proceeded to enforce the lower price. The High Court of Australia set aside the contract, finding that Mr Taylor’s silence was unconscionable conduct – he knowingly took advantage of Mrs Johnson’s mistake.
Key lesson: If you become aware that the other party is mistaken about a core term (such as price, quantity, or subject matter), you have a duty to correct it. Failing to do so can make the contract voidable for unconscionable conduct.
Frequently Asked Questions
What is the difference between a contract being void and voidable for mistake?
A void contract never existed legally, whilst a voidable contract remains valid until formally rescinded. Under Australian law, mistakes typically make contracts voidable rather than void, providing greater commercial certainty.
Can I escape a contract if I made a mistake about its value?
Generally not. Simple errors in judgment about commercial value do not provide grounds for escaping contractual obligations. The mistake must relate to fundamental aspects of the agreement rather than its commercial wisdom.
What happens if both parties made the same mistake?
Common mistakes about fundamental matters may make contracts void at common law. However, shared errors in judgment or assumptions about future events typically do not provide grounds for avoidance.
How long do I have to claim mistake?
There is no specific limitation period for mistake claims, but delays may affect available remedies. Courts consider factors such as knowledge of the mistake, actions taken after discovery, and prejudice to other parties.
Does signing a contract prevent me from claiming mistake?
Not necessarily. The signature creates a presumption of agreement, but mistake claims may still succeed where the requirements are met. However, courts expect parties to read and understand contracts before signing.
