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3 Types of Mistakes in a Commercial Contract  

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Commercial contracts form the backbone of business relationships. Your agreement with another party will set out both of your respective rights and obligations. Errors can creep into your agreement with the other party, despite your best intentions. As a business owner, it is crucial you understand the types of mistakes that can be made in commercial contracts. You must understand the types of mistakes in order to protect your business. This article explains the three main types of mistakes that can be made in commercial contracts and how you can protect your business against mistakes. 

What Are Mistakes in Contract Law?

In contract law, a mistake occurs when you or the other party holds an untrue belief. This untrue belief could be related to the facts or the law. If you are the misled party, you may choose to set aside the agreement. Alternatively, you may wish to pursue damages or a combination of both. Significant consequences stem from mistakes in contracts. You may still enforce the contract despite the mistake. Likewise, you may hold your contract voided altogether due to the mistake. 

Notably, even innocent mistakes can make your contract voidable. As such, your contract in this event will be unenforceable. The rules and consequences governing mistakes vary based on the exact factual circumstances and the type of mistake involved. 

A mistake in contract may involve the following:  

Identity of the other party You might enter into a contract under a mistaken belief about who the other party is.
The subject matter of the contractWhen there are mistakes about the subject matter in a contract, it means that there are misunderstandings or errors related to the main object or service that the contract is about.
For example, you agreed to purchase jasmine rice from Party B but received basmati rice instead. Party B doesn’t sell jasmine rice and has never held out that they sell jasmine rice.
Contractual TermsYou may be mistaken about the specific terms outlined within your contract. 
For example: you and Party B enter into a contract for a service subscription. Unfortunately, you are under the mistaken impression that the subscription payment occurs monthly. However, the contractual terms stipulate payment occurs at the end of each week. As such, this leads to a mistake regarding the contractual terms. 
Nature of the contract Mistakes about the nature of the contract involve misunderstandings regarding the fundamental purpose of the type of agreement being entered into. 
For example: you may decide to lease an office from Party B for the purpose of engaging in commercial retail activities. However, you subsequently discover that the building is exclusively zoned for residential use. 

Types of Mistakes 

Under the Contract and Commercial Law Act 2017 there are three main types of mistakes that can be made in commercial contracts. These include, unilateral, common and mutual mistakes which will be described below. 

1. Unilateral Mistake

Unilateral mistakes occur when you make a significant error, factual or legal, that is material to your decision to enter the agreement. Crucially, the other party to your contract needs to be aware of your mistake. Summarily, if the other party knows you misunderstood a crucial aspect of the contract; the contract may be unenforceable.

For example, suppose you and Party B engage in a contract. You hold a misconception about a crucial term within the contract. However, Party B is fully aware of this error and your misconception. Very likely, the court will determine there is no contract between you and Party B. For a contract to be legally binding, both you and Party B must fully understand and agree to the contract terms.

2. Common Mistake

Common mistakes occur where both you and the other party to your contract share the same mistaken belief about a significant aspect of the agreement. This could be in relation to either the facts or legal matters concerning your contract. If both you and the other party have misunderstood a fundamental contract element, your contract could be void or voidable.

For instance, you and the other party may unintentionally enter into a contract for a malfunctioning piece of equipment. This constitutes a serious common mistake. Such a mistake will likely render your contract invalid or cancelled.

3. Mutual Mistake

A mutual mistake is the least common out of the three types due to its complex nature. This type of mistake arises when both you and the other party are mistaken about different elements within your contract. The challenge then arises for you and the other party to identify the objectively correct position; despite both of your differing positions.

Notwithstanding that you and the other party have made errors, your contract may still be enforceable. If a reasonable interpretation of your contract aligns with both your intentions, your contract may be salvaged.

For example, you and Company B enter into a contract of sale for a piece of equipment. Company B will sell you the equipment in exchange for a sum offered by you. Both you and Company B believe you are talking about the same kind of model. However, as it turns out, there are two versions with important differences that both you and the other party did not know about. If the court can reach a fair and just decision for both parties, your contract might still be valid. However, multiple interpretations of the contract may exist based on the words and actions of the parties. In this event, it is likely your contract will be deemed voidable by the court. 

As a business owner, it is crucial you understand these distinctions regarding mistakes in contracts. You must understand the differences so you can appreciate the legal implications of each type of mistake. It is advisable that you seek legal advice if you have any uncertainty over contract terms. 

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Potential Remedies 

In the event of a mistake, courts have the discretion to grant various forms of relief, including:

  • declaring the validity (in whole or part) of the contract, making it enforceable despite the mistake;
  • modifying the contract;
  • terminating the contract;
  • providing restitution or compensation; or 
  • assessing relevant proprietary documents in a party.

Other options include: 

  • Rectification: This is a legal remedy which enables the court to adjust the terms of your written contract. The court will do this to match the shared intention of you and the other party to your contract. To seek rectification, you need to prove that the contract contains errors and that there was an agreement on different terms; or
  • Non est factum: You can rely on this remedy if you have signed a document without understanding it. If you can prove non est factum, the court cancels the contract. The court will do this if you were deceived into entering the contract. Likewise, you may have not sufficiently understood the contract. Crucially, a lack of understanding, under non est factum, must occur in a way that is not your fault. Tangentially, your lack of understanding also must not have occurred due to you not taking reasonable steps to understand the contract. 

However, ignorance of the terms of the contract will ordinarily not constitute grounds for the contract to be cancelled. Ignorance may include you electing not to take advice regarding the contract terms. 

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Key Takeaways 

Three types of mistakes can be made in commercial contracts. These include unilateral, common and mutual mistakes. In the aftermath of a mistake, seeking legal advice is crucial. A qualified lawyer can assist in reaching an agreement to resolve the situation. If the matter escalates, the court will decide whether to uphold your agreement. Generally, New Zealand courts prefer retaining contracts and adjusting obligations through explicit or implied terms. It is advisable to consult a lawyer to review your contracts before they become binding to avoid any repercussions. 

If you need help reviewing your contracts to avoid a mistake, contact our experienced contract lawyers as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0800 005 570 or visit our membership page.  

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Helen Yu

Helen Yu

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