Mistake of Fact and Law in Contracts: Legal Outcomes

In contract law, a mistake refers to an erroneous belief held by one or both parties at the time of contract formation. Such mistakes can significantly impact the validity and enforceability of agreements. Under the Indian Contract Act, 1872, mistakes are categorized into two primary types: Mistake of Fact and Mistake of Law.

1. MISTAKE OF FACT

A Mistake of Fact occurs when parties have an incorrect understanding about a fundamental aspect of the contract. This can be further divided into:

a. Bilateral Mistake (Section 20):

  • Definition: Both parties are under a mutual mistake regarding a fact essential to the agreement. Such agreements are void.

  • Essentials:

    • The mistake must be mutual.
    • It must pertain to a fact essential to the agreement.
  • Illustration: A agrees to sell his car to B. A believes he is selling his sedan, while B believes he is buying A’s SUV. Here, both parties are mistaken about the subject matter, rendering the agreement void.

  • Case Law: In Galloway v. Galloway (1914), a couple, mistakenly believing they were married, executed a separation agreement. It was later discovered that their marriage was void. The court held the separation agreement void due to the mutual mistake regarding their marital status.

b. Unilateral Mistake (Section 22):

  • Definition: Only one party is under a mistake regarding a fact. Such contracts are not voidable solely on the basis of this mistake.

  • Exceptions:

    • If the mistake is induced by fraud or misrepresentation by the other party.
    • If the mistake pertains to the nature of the contract or the identity of the contracting party.
  • Illustration: A bids in an auction, believing he is bidding for a vintage painting, but the item is actually a replica. If the auctioneer did not misrepresent the item, A cannot void the contract based on his unilateral mistake.

  • Case Law: In Smith v. Hughes (1871), the buyer believed he was purchasing old oats, but the seller supplied new oats. The court held that the contract was valid as the mistake was unilateral, and the seller had not misrepresented the oats.

2. MISTAKE OF LAW

A Mistake of Law involves an incorrect belief about the legal implications of a fact or situation.

a. Mistake of Indian Law (Section 21):

  • Principle: A contract is not voidable because it was caused by a mistake as to any law in force in India. The maxim “ignorantia juris non excusat” (ignorance of the law is no excuse) applies.

  • Illustration: A enters into a contract without knowing that a particular law prohibits such agreements. Later, A seeks to void the contract citing ignorance of the law. This plea will not be entertained, and the contract remains valid.

b. Mistake of Foreign Law:

  • Principle: A mistake as to a law not in force in India is treated as a mistake of fact.

  • Illustration: An Indian exporter enters into a contract to ship goods to a country where such goods are prohibited. Both parties are unaware of this foreign prohibition. This mistake is treated as a mistake of fact, potentially rendering the contract void.

  • Case Law: In Cooper v. Phibbs (1867), the plaintiff leased a fishery from the defendant, both believing the defendant had the right to lease it. It was later discovered that the plaintiff already had a life interest in the fishery. The court treated the mistake regarding the private right as a mistake of fact, rendering the lease voidable.

KEY DIFFERENCES BETWEEN MISTAKE OF FACT AND MISTAKE OF LAW

Aspect Mistake of Fact Mistake of Law
Definition Incorrect belief about a fact essential to the contract. Incorrect belief about the legal implications of a fact or situation.
Legal Outcome Bilateral mistakes render contracts void; unilateral mistakes generally do not, unless exceptions apply. Mistakes regarding Indian law do not affect contract validity; mistakes about foreign law are treated as mistakes of fact.
Applicability of Exceptions Exceptions exist for unilateral mistakes involving fraud, misrepresentation, or identity/nature of contract. No exceptions for mistakes of Indian law; foreign law mistakes treated as factual mistakes.

CONCLUSION

Understanding the distinctions between Mistake of Fact and Mistake of Law is crucial in contract law. While bilateral mistakes of fact can void a contract due to the absence of true consent, unilateral mistakes typically do not, unless specific exceptions apply. Conversely, mistakes of law, especially concerning Indian law, do not provide grounds to void a contract, emphasizing the principle that ignorance of the law is no excuse.

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