First, before any resulting contract will be invalidated the mistake must be about somethingso fundamentalto the parties’ agreement that they did not really agree at all, at least not inany true sense. In such cases it would not be fair to hold them to their ‘agreement’ and, forthat 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 thatthey have some legal significance. If the mistake was not about something fundamental tothe 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 determinedobjectively. That is, it is not sufficient simply to ask whether the parties intended the samething — you have to ask whether a reasonable bystander hearing their discussions wouldhave 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 motivesprovide no recourse whatsoever. Therefore, if a party enters into acontract because of amistaken belief that a certain end outcome is likely, he or she will notbe allowed to escape liability if that outcome does not eventuate. As Lord Atkin put it in Bellv Lever Bros. Ltd AC 161 at 224:It seems immaterial ...that if he had known the true facts he would not have enteredinto the bargain. A buys B’s horse; he thinks the horse is sound and he pays the priceof a sound horse; he would certainly not have bought the horse if he had known thatthe horse is unsound ... A is bound and cannot recover back the price ... If partieshonestly comply with the essentials of the formation of contracts — that is, agree inthe same terms on the same subject matter — they are bound, and must rely on thestipulations 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 mistakenlybelieving that some significant and relevant underlying state of affairs exists when it doesnot. For example, inNorwich Union Fire Insurance Society Ltd v William H. Price LtdAC 455, the insurers paid a claim in the mistaken belief that the insured cargo had beendamaged through one of the risks insured against. In fact, it had not been damaged at allbut 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 wasone of fact and the insurers could recover their money.Mistakes of law occur when a party enters into a contract under some significant andrelevantmistake as to his or her legal rights, liabilities or obligations under statute, commonlaw or some private agreement. Mistakes of law, like mistakes of fact, can provide a right to
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