Mistake

Mistake Negating Contracts

A mistake may be a basis for unjust enrichment.  If monies or assets are transferred on the basis of a mistake, such as to invalidate an underlying contract, restitution is generally allowed.

The law of contract does not allow avoidance of a contract on the grounds of a mistake as to circumstance or expectations. The categories of mistake will allow rescission and cancellation of contracts are relatively narrow.  The law of restitution will not allow a backdoor remedy for mistakes as to failed expectations.  Restitution will only come into play when the contract fails entirely.

Formerly, the courts denied relief for mistakes of law. Mistakes of law may involve misunderstanding or ignorance of statutes, laws, deeds or documents.  Mistakes as to ownership of property or assets are usually categorised as mistakes of fact. The UK courts now allow relief for mistakes of law, and the Irish courts are likely to follow suit.

However, other principles continue to apply which limit the extent to which mistakes of law may invalidate contracts.  Where litigation is brought and settled, even if it has no basis, this is sufficient consideration for a contract.

Operative Mistake

Mistake may be the unjust factor allowing recovery by way of restitution. However, the category of mistakes that are operative are relatively narrow. In general terms, the fact that one has made an error (in the broad sense) in entering the transaction is irrelevant. See generally the sections on mistake and contract law.

Many of the circumstances in which restitution is allowed, might be categorised as deriving from a mistake in its broadest sense. However, in this current context, mistake is limited to very fundamental mistakes and failures of assumption, by which there is no contract or some apparent contracts which are so fundamentally flawed, that they are set aside.

The House of Lords has overruled the historic refusal to afford remedies and recovery on the basis of a mistake of law. A mistake of law based a subsequent court finding that local authorities never had the power to enter certain derivative financial instruments was held to be operative. That is, it had the effect of negating the existence of a contract.

Total Failure of Consideration

Restitution is not allowed, where there is a contract in place unless it is discharged for a total failure of consideration.  Where there is a contract, this will determine the position.

Certain categories of mistake will negate a contract so that there is a total failure of consideration.  Where however the mistake is not fundamental, the contract will not be negated and no restitution will be available.

Non-Contractual Mistaken Payments

Restitution may be allowed for a wide category of mistaken payments, other than the ones which invalidate the existence of a contract. Money which is paid by mistake, whether paid by way of gift or under an apparent contract may be recoverable in these cases

A gift may be mistakenly given to the wrong person.  In principle, any kind of mistaken transfer, even one induced by the claimant’s own fault, may be subject to restitution.

The classic case of payment by mistake for which restitution allowed is a that of double payment. A mistaken payment to the wrong person for so long as the third party holds the monies.

Generally, the mistake must be basic and go to a fundamental aspect of the matter.  For example, a gift given on some kind of mistaken private assumption or expectation, may not be set aside. However, where a gift is made on an assumption and basis that should be apparent, then restitution is likely to be available.

In the context of failed engagements (for marriage), statute law specifically provides that gifts maid are returnable, if the engagement is broken or if the marriage does not proceed.

Transfer of Title

Where the underlying contract in relation to the transfer of property is invalidated, then the owner is generally entitled to recover it, on the basis of his property rights.  A legal action for conversion may be taken to recover the property in the hands of the third party.

The above position applies in respect of movables and goods, which pass by delivery. In the case of an operative mistake affecting immovables (real property), which are transferred by deed, the transferor may acquire an equitable claim to have the property re-vested.

In the case of assets which are transferred by deed or special formality, the assets do not revest automatically.   In some circumstances, a constructive trust may arise. In the meantime, they are held by the transferee as a bare nominee. There is an equitable claim to apply to the court to have them retransferred.   This may not be asserted against a bona fide purchaser.

Where an asset is held by a third person and it is recovered, but a third person has improved it, an allowance may have to be made for the improvement where this is just and equitable.

Recovery of  Goods

Where title to goods or assets has been transferred, by reason of a mistake in the present sense., the question arises, as to whether the transfer of property may be reversed. In the case of a wholly void contract such as where a person claims to be another specific person and on the faith of that person’s credit, goods are transferred, legal title does not pass. There is an and has been no contract

Most types of mistake and misrepresentation do not negate the contract but allow for the contract to the be set aside. The title that has passed is voidable. When the transaction is later voided, the goods re-vest in the transferor and his title may be asserted against the transferee. There may be both a personal claim for monies and a proprietary claim.

Credit must be given for the proprietary recovery in the personal recovery. The claimant may not recover twice for the same loss.

Recovery of Money

Money paid by reason of a mistake of fact is presumptively recoverable as money had and received to the use of the payer. This is so regardless of whether the recipient is aware of the mistake or whether he caused it. Restitution will not usually be allowed where there is a contract, which remains in place unless there is a total failure of consideration.

The claim for money had and received is a common law remedy.  It is therefore not subject to the limitations of an equitable remedy.

There will frequently be a property based remedy as well.  Where possession of assets is transferred and title or ownership have not passed, the position will be clear. Money being debt is more complex.

In some cases, the courts may impose a constructive trust and thereby give a proprietary remedy.  This will hold good even in the event of the recipient’s insolvency. A proprietary remedy will, however, be subject to limitations.  When the asset passes to a third party who gives value, it is no longer available.  (See the sections on tracing).

Payment for Goods and Services Mistakenly Provided

Where services are provided or goods or assets are provided by mistake, the recipient may be required to pay for the value of services received or of goods received

Where more goods than contracted for are delivered, the Sale of Goods Act codifying the common law provides that if they are accepted, that the extra amount must be paid at the contract rate.

Where a service is rendered by mistake, there is a presumption that there is a right to restitution.  This is quantum merit.

However, where there is no free acceptance of an unsolicited benefit, restitution is not generally available. Where there is neither acceptance nor acquiescence, an incontrovertible benefit may be sufficient for restitution, notwithstanding the element of forced exchange. This is controversial and the position is not fully established.

Estoppel or Acquiesence

Acquiescence is an intermediate position between acceptance of a benefit and rejection. If a person sees a service or thing being done for him, knowing that the other has made a mistake and this is the reason why it is being done, then some contexts, an equity may arise. See generally the sections on estoppel.

The classic example of estoppel involves a person who improves land, thinking it is his own, while the true owner stands by knowing that it is not, and perhaps encouraging him in his incorrect belief. Another example is where a person has been led to believe that the land is his or would be given to him, and in reliance on such representation or inducement, acts to his detriment in incurring expenditure or an investment of time.

In these cases, equity give relief by way of a lien or proprietary interest. The concept of proprietary estoppel overlaps with restitution. It may apply where improvements are made to land and the true owner stands by in circumstances where it would be inequitable to allow him to take the benefit.

The extent of the equity depends on the position of the person who has benefitted, and the, in particular, the extent, if any, to which he has encouraged the mistaken relief. The person who has benefited must have been aware, stood by or acquiesced in the benefit. A person is not liable for a benefit that is forced on him. There must be some element of acceptance or acquiescence.

The principle of subrogation may overlap with restitution, where debt is discharged on behalf of a third person.  (See the separate chapter in this regard).

Limitations to Recovery

There are limitations to recovery. Where the third party recipient changes his position in reliance on the good faith belief that the payment has been validly made for him, restitution may be denied.

Circumstances may negate a right of restitution that would otherwise apply. A person may clearly intend to give a benefit irrespective of whether a given state of affairs applies or not, notwithstanding that the state of affairs is part of the motive for giving that benefit. In effect, he undertakes the risk that the position as assumed may not be so.

Unlike the case with immovable property or assets transferred in error, the receipt of a service in error cannot readily be undone after the event. In the absence of free acceptance which sufficient for quantum meruit or quantum valebat, there will not usually be recovery for the provision of services in error. It is usually assumed that a person who provide services, does so at his own risk and that liabilities should not be forced upon a person against his will.

Generally, payments wrongly made or the purpose of compromising or settling litigation may not be recovered. This is a principle of public policy. Without it, there might be otherwise no finality in respect of litigation.