First before any resulting contract will be

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First, before any resulting contract will be invalidated the mistake must be about something so fundamental to the parties’ agreement that they did not really agree at all, at least not in any true sense. In such cases it would not be fair to hold them to their ‘agreement’ and, for that reason, the courts are willing to hold that such ‘agreements’ are contractually invalid. Such mistakes can be referred to as ‘operative mistakes’ — ‘operative’ in the sense that they have some legal significance. If the mistake was not about something fundamental to the agreement but about something that was merely peripheral to it, it will not be ‘operative’ and the resulting contract will remain enforceable. Secondly, whether a contract has been affected by mistake has to be determined objectively . That is, it is not sufficient simply to ask whether the parties intended the same thing — you have to ask whether a reasonable bystander hearing their discussions would have thought that they had agreed to the same thing in the same terms. Thirdly, the contract will only be invalid if the operative mistake was of either fact or law. Mistaken motives provide no recourse whatsoever. Therefore, if a party enters into a contract because of a mistaken belief that a certain end outcome is likely, he or she will not be allowed to escape liability if that outcome does not eventuate. As Lord Atkin put it in Bell v Lever Bros. Ltd [1932] AC 161 at 224: It seems immaterial ...that if he had known the true facts he would not have entered into the bargain. A buys B’s horse; he thinks the horse is sound and he pays the price of a sound horse; he would certainly not have bought the horse if he had known that the horse is unsound ... A is bound and cannot recover back the price ... If parties honestly comply with the essentials of the formation of contracts — that is, agree in the same terms on the same subject matter — they are bound, and must rely on the stipulations of the contract for protection from the effect of facts unknown to them. A mistake of fact occurs when one party enters into a contract honestly but mistakenly believing that some significant and relevant underlying state of affairs exists when it does not. For example, in Norwich Union Fire Insurance Society Ltd v William H. Price Ltd [1934] AC 455, the insurers paid a claim in the mistaken belief that the insured cargo had been damaged through one of the risks insured against. In fact, it had not been damaged at all but had been sold because it would not have reached Sydney in a merchantable state. Because the mistake was as to the circumstances giving rise to the obligation to pay, it was one of fact and the insurers could recover their money. Mistakes of law occur when a party enters into a contract under some significant and relevant mistake as to his or her legal rights, liabilities or obligations under statute, common law or some private agreement. Mistakes of law, like mistakes of fact, can provide a right to
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© Stephen Graw 2012
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