Published On: Thu, Jan 28th, 2016

Determining a mutual mistake in a transaction

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Dr Peterside plans to establish a private hospital in Port Harcourt. For this purpose, he contacts the estate agent for Garden City Complex, which has available facilities in Blocks A, B and C. After careful examination of the premises, the doctor settles for the ground floor of Block B.

A lease agreement is drawn up and sent to Dr Peterside for signing and payment of the fees due. The document contains the terms of agreement including the annual rent, caution deposit, a 10 per cent charge for agency fees and another 10 per cent for legal fees. The document does not specify the tenure of the lease.

On presentation of a cheque for payment, a dispute arises between Dr Peterside and the estate agent. The doctor has written a cheque to cover one year’s rent and additional charges, as determined by the lease. However, the estate agent had been expecting the initial payment to cover two years’ rent, as is the custom of lease agreements in Port Harcourt. He explains that the whole transaction was premised on the anticipation of two years’ rent and presents receipts of payments for other tenants, to support his position. The estate agent demands that Dr Peterside pay the rent for two years or forfeit the lease.

In this scenario, what is the legal position of the parties concerning the mistake made in the transaction?

As previously discussed, there are three classes of mistake in law: a) Common mistake; b) mutual mistake; and c) unilateral mistake. The subject of the above scenario is mutual mistake. When one party makes to the other an offer which is accepted in a fundamentally different sense from that intended by the offeror, it is classified as a mutual mistake.

The legal issues to be addressed are:

  1. How is a mutual mistake determined in law?
  2. The effect of a mutual mistake in a transaction.

The general rule, as applied in the case of Wood v. Scarth, is that where the occurrence of a mutual mistake is established, the contract will be void. This is because there is no correspondence between the offer and acceptance. There is no consensus ad idem (meeting of minds). In determining the existence of a mutual mistake, the court adopts an objective test. The conduct of the parties and all relevant documents and transactions are considered. If they all point to the existence of a contract, as alleged by one of the parties, the court will enforce the contract on those terms, irrespective of the motive or subjective intention of the parties. The court bases its decision on the external appearance of things and ignores all subjective factors.

If, on the other hand, all these external factors do not point to the existence of one contract, but to two or more possible interpretations of what transpired between the parties, then there can be no contract. The agreement will be void for mutual mistake.

In this matter with Dr Peterside and the estate agent, a transaction was made for the lease of property in Port Harcourt. According to the expectation of the estate agent, the lease should run for an initial period of two years. This would translate to the payment of two years’ rent by Dr Peterside for the property. The doctor, on his part, had made no commitment to pay the rent for two years upfront. Indeed, his plan was to pay the annual rent with additional charges and so, a cheque for that amount was made available.

The argument of the estate agent is that the practice of two years’ lease is common in the city of Port Harcourt. Proof of this is provided by the presentation of receipts of payments for other tenants, who apparently had paid in advance for two years. In view of this, it is not doubtful that the estate agent had the expectation of concluding a two-year lease. Nevertheless, the rule regarding mutual mistake requires the application of an objective test. In this situation, there must be an examination of the document of transaction.

The lease of agreement between the parties is specific on the terms of transaction. This lease stipulates the annual rent, caution deposit, a 10 per cent charge for agency fees and another 10 per cent for legal fees, but fails to mention the duration of tenancy and the number of years required to be contracted for.

In the similar case of Wood v. Scarth, the defendant offered in writing to let a public house to the plaintiff for 63 pounds per annum and the plaintiff, after an interview with the defendant’s clerk, accepted the letter. The defendant intended that a premium of 500 pounds be included, but this was neither mentioned in the letter of offer nor by his clerk in the interview. The plaintiff, on his part, believed that his obligations were limited to 63 pounds per year.

When the defendant refused to execute the lease agreement, the plaintiff brought an action for specific performance and the defendant raised the defence of mistake. It was held by the court that there was no mistake at law. No reasonable man, looking at what had transpired between the parties, would have interpreted the agreement to mean anything other than that it was a simple lease agreement for 63 pounds per annum.

In applying this rule, the lease of Dr Peterside does not, in any way, bind him to a contract of two years and subsequently, the payment of two years’ rent. It is therefore concluded that the contract is valid on the payment of the stated fees.

Principles and cases are from Sagay: Nigerian Law of Contract

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Determining a mutual mistake in a transaction