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Mistake of Law and Mistake of Fact under Indian Contract Act, 1872

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In Contract Law, there is a concept of consensus ad-idem which literally translates to the meeting of the minds. To an ordinary person, it could be explained by saying that the intentions of the parties which are forming the contract need to be on the same page. Both the parties to the contract must have a common understanding while entering into the contract by proposal and offer and acceptance. Consensus ad-idem is a vital aspect of the contract because it is essential to ensure that both the parties entering the contract are completely aware of the terms of the agreement and they understand the contract in the same sense. However, in the absence of consensus ad-idem or meeting of the minds, the parties may happen to be mistaken. Such a mistake could be an incorrect belief. Even though the mistake may be an innocent one in nature, it might be capable of leading the other party to a misunderstanding. A mistake in law, therefore, is not the same as an ordinary mistake in life.

What is Mistake of Law?

Law is formed on the foundation of a lot of maxims which is like a fundamental moral rule or legal principles that need to be considered to make law. The Latin maxim of ‘ignorantia juris non excusat’ is one such maxim which literally means that ignorance of the law is no excuse. The Indian Contract Act, 1872 is the legislation which governs contract law in India. Under section 21 of the Indian Contract Act, 1872, it is mentioned that the mistake of the parties in comprehending and understanding any laws that are enforceable in the country of India cannot render a contract to be voidable. So if one party of a contract claims that they did not know the law, and are claiming relief under the defence of ‘Mistake of Law’ which is that they were unaware about Indian Law, the party will not be successful in claiming relief on such grounds.

To illustrate this as an example for better understanding, if a man called Mr. X is travelling on a train without a ticket, and is caught by the ticket conductor of the train. That man cannot claim that he did not know that a ticket is needed to travel on the train. Mr. X will, therefore, be punished under Section 138 of The Indian Railways Act, 1989.

Exceptions to Mistake of Law

1) Mistake vis-a-vis a Foreign Law

A mistake in understanding a foreign law is to be treated exactly like a mistake of fact under the provisions of Section 21 of the Act. The thought process behind this provision is that the parties in a contract can not be expected to know all of the provisions of any foreign law and what the foreign law means. The law of a foreign land is not known by everyone, hence if in case the parties in a contract make a mistake of the foreign law, the contract is to be considered void in nature.

To illustrate this as an example for better understanding, if an Indian company is agreeing to sell an Australian company 500 units of a potion which contains 50% Sulphuric Acid, but the law in Australia bans the sale or purchase of mixtures containing more than 40% of Sulphuric acid, then this contract between the Indian and Australian company is declared void since the Indian company is under a mistake of foreign law.

2) Mistake vis-a-vis Private Rights

The private rights possessed by an individual depend on the rules of law as a matter of fact since any reasonable man can not be expected to know the full private rights of another. Therefore, even for parties in a contract, it is not possible for them to know all the private rights possessed by the other party.

This is explained well in the case of Cooper v Phibbs(1867). In the concerned case, the plaintiff took a lease of the right of the fishery from the defendant. However, the plaintiff was not aware of the fact that he was already having a life interest in the right of the fishery. As a result, the plaintiff then filed for a suit to cancel the lease. The defendant argued that he had committed a mistake of law. The verdict held that when there is a mistake with regards to the general right or ownership, that mistake can be considered to be as a mistake of law, which is why it can render the contract to be declared as a void in nature. 

What is Mistake of Fact?

Another maxim that provides a framework to the law of contract is the maxim of ‘Ignorantia Facti Excusat’ which literally means that ignorance of a fact can be an excuse. Under Section 20 of the Indian Contract Act, 1872, it is mentioned that a contract is considered to be void in nature when both the parties to the agreement are under a mistake with regards to a particular fact of the agreement.

A mistake of Fact under Contract Law can be classified into 2 kinds-

1) Bilateral Mistake covered under Section 20

Section 20 of the Act talks about Bilateral Mistake. Section 20 is only applicable when the following three conditions are fulfilled in a situation:

  1. The mistake of fact must be committed by both the parties. Therefore, the mistake must be mutual.
  2. The mistake has to mandatorily be with regards to some fact.
  3. The mistake committed by both the parties must be with regards to such a fact which is essential to the contract.

We can understand that when both the parties make a mistake which is related to essential facts like the subject matter of the contract, the contract can very much be declared as a void in nature. This is simply because there is a lack of consensus ad-idem between the parties since they are both under a mistake of some fact and therefore their minds are not on the same page which is very essential for a contract between parties.

However, it must be duly noted that a mistake of fact does not constitute the parties having different opinions about the subject matter of the agreement with regards to its value. Such opinions are inconsequential to the agreement and hence are not a mistake of fact.

There are different Types of Bilateral Mistakes:

1) Mistake with regards to the fact of the existence of the subject matter

There are certain situations when the subject matter of the contracts ceases to exist even before the parties make an agreement, and the parties to the contract may not always know about this fact. In such a scenario, the entire contract exists on the subject matter, and if the subject matter of the contract is not existing only then the contract perishes and is declared void in nature.

This can be understood better from the case of Galloway vs. Galloway(1914). In this case, a couple of a woman and a man were under the belief that they were married. Under this belief of being married, they decided to make a separation agreement. However, later, it was found that the man’s first wife was still alive, therefore that rendered the marriage and the separation agreement void. The verdict held that since the parties of the separation agreement only assumed that they were married to each other, they could not enter into the separation agreement because it was void due to the first marriage of the man. 

2) Mistake with regards to fact of the quality of the subject matter

A contract will still be said to be valid if both the parties to the contract are not under a mistake with regards to the subject matter of the contract but are under a mistake with regards to the subject matter’s quality.

This can be better understood in the case of Smith vs Hughes(1870). In this case, the plaintiff entered into an agreement with the defendant to buy a certain quantity of Oats from him. The defendant believed that the oats were old. Whereas in reality, the oats were new. The verdict of the case held that just because the defendant was under the mistake with regards to the oldness of the oats, he cannot avoid the contract. 

3) Mistake with regards to the fact of the quantity of the subject matter

An agreement is said to be void if both the parties to the contract are mistaken with regards to the quantity of the subject matter. For instance, A enters into an agreement with B to buy a car from B. A enters this agreement on the basis of B’s letter where B has mentioned the price of the car to be Seventy Thousand instead of Seven lakhs due to an error in typing. This agreement between A and B will be considered void in nature since there was a mistake with regards to the quantity of the subject matter.

4) Mistake with regards to the fact of the title of the subject matter

There can be situations where the buyer of a good or buyer of a property may not know that he is already the owner of the said good or property that he wishes to buy. Both the seller and the buyer might be mutually mistaken about the tile of the good or the property. In such cases, the seller does not possess the good or property and therefore he cannot transfer it to the buyer and therefore there is no contract between them because the contract immediately becomes void in nature.

This can be explained in the case of Cooper v Phibbs(1867). In this case, an uncle who did not want to misrepresent anything but because of an error thought that he was the owner of a fishery. He told his nephew about the entitlement of the fishery. When the uncle died, the nephew, who was under the assumption that the uncle was entitled to the fishery because of what the uncle told him before dying, decided to enter into an agreement with the uncle’s daughters to rent the fishery. However, in reality, the truth was that the nephew himself was entitled to the fishery because it was revealed that the uncle had granted the nephew a life tenancy of the fishery in his will. The lease between the nephew and his sisters was therefore declared to be void because the nephew was  entitled to an equitable residual interest of the fishery and therefore he could not rent it,

2) Unilateral Mistake covered under Section 21

Section 21 of the Act mentions the provisions of unilateral mistakes. As per the provision, when one of the parties to the contract is under a mistake with regards to any facts concerning the contract, the said contract cannot be considered to be voidable for the sole reason that it was a unilateral mistake by one of the parties to the contract. Therefore, under Section 21, a unilateral mistake does not possess the influence to render a contract valid or invalid and cannot be the basis for a contract to be put aside in the court of law. 

This can be better understood in the case of Tapline Vs Jainee(1880). In this case, a buyer buys property at an auction. The property is described by a plan in the auction. The buyer assumes that he knows about the features of the property properly and as a result, he does not deem it important to refer to the plan of the property and study it. After the buyer’s purchase of the property, he found out that this particular garden plot was not a part of the property plan but he had thought that the garden plot was a part of the property. So the verdict of the case held that the buyer of the property will not be able to revoke the contract due to his unilateral mistake. Despite the mistake he made, the buyer was still bound by the contract.

Exceptions to a Unilateral Mistake in Contract Law:

When a party commits a unilateral mistake, there is a possibility that the contract can be avoided. This is possible if it can be proven that the parties to the contract entered into the contract due to either fraud or misrepresentation committed by one of the parties to the contract to induce the other party into the contract.

1) Mistake committed by one party with regards to the nature of the contract

When one of the parties to the contract misunderstands the very nature of the contract and makes a mistake while entering into the contract, but the other party is aware of such a mistake being committed, then such a contract can be considered to be void.

It is possible that while executing a contract, a party does not understand the nature of the contract he is entering into. This misunderstanding can arise either due to fraud or misrepresentation by the other party. It is also possible that this misunderstanding happens due to the old age or bad health of the party entering in the contract.

We can see this in the case of Dularia Devi v. Janardan Singh(1990). The case consists of a woman who was illiterate and was asked to put her thumb impression on two documents. The woman thought that both these thumb impressions were required to gift some of her property to her daughters. Later she found out that the second document on which she gave her thumb impression was an attempt to defraud her and her property. Although we might consider this to be a unilateral mistake committed by the illiterate woman, the Court held the contract to be void since the consent of the old woman to enter into the agreement was gained by fraudulent means. The woman did not even know about the malicious nature of this transaction she entered into which is why the Court declared the contract void in nature.

2) Mistake by one party with regards to the identity of the parties to the contract

In ordinary circumstances, to enter into a contract, the identity of the parties entering into the contract is not essential for executing the said contract. However, there are certain cases, when one of the parties to the contract makes a unilateral mistake with regards to the identity of the other party entering into the agreement. This unilateral mistake can be committed by the party due to misrepresentation by the other party which is claiming itself to be someone which he is not in reality. Only in such cases of misrepresentation, can the agreement be considered to be void in nature.

This is illustrated really well in the case of Cundy v Lindsay (1878). In this case, Lindsay & Company used to manufacture linen handkerchiefs and other such things. Lindsay & Company received an order from a man named Blenkarn of manufacturing Two Hundred and Fifty Dozen of handkerchiefs. This man, Blenkarn, forged the signatures of “Blenkiron & Co.” which was a renowned firm. As a result of this, Lindsay & Company assumed that this order that they received from Blenkarn was actually from the reputed firm of “Blenkiron & Co.” and thus they successfully made the delivery of the order. After receiving the delivery, Blenkarn sold these handkerchiefs to an innocent party named Cundy. But Blenkarn was not able to pay Lindsay & Company for their order of 250 dozen handkerchiefs. As a consequence of this, Lindsay & Company sued Cundy for the goods and not Blenkarn because according to Lindsay & Company, they had sold the goods to Blenkarn assuming that they were selling it to Blenkiron & Co and therefore were under a mistake. They claimed that they did not really consent to this contract of sale. In the verdict of this case, it was held that the claimants had committed a unilateral mistake with regards to the identity of the other party. This mistake rendered the contract void. And since the contract between Blenkarn and Lindsay & Company was void, the title of the goods sold did not pass to Blenkarn, which therefore means that the title of the goods sold did not pass to Cundy either who was liable to return the goods back to Lindsay & Company.

Conclusion

A contract is rendered invalid when the consent of the parties entering into the contract is gained through a mistake by the parties. That mistake can either be a mistake of fact, or it can also be a mistake of law. When the parties’ consent is gained because of a bilateral mistake of fact, the contract becomes void in nature but if the mistake is a unilateral mistake of fact the agreement is not void unless the mistake is concerned with the nature of the contract and the identity of the parties to the contract. On the other hand a mistake of law can render a contract void if both the parties to the contract commit the mistake with understanding foreign law, if the mistake is committed with Indian law, the contract stands to be valid. 

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Virali Joisher

Student, Kirit P Mehta School of Law, NMIMS Mumbai

Virali is an enthusiastic law student who has big ambitions, and a bigger spirit to always keep learning. She is exploring her interests in the field of law and feels strongly for women’s issues. For any Clarifications, feedback, and suggestion, you can reach her at virali.joisher@gmail.com

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