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High Court upholds contract entered into by mistake

Out-Law News | 11 Nov 2008 | 4:56 pm | 3 min. read

A contract based on a mistake by one of the parties can be valid even if the other party to the contract is aware of the error, the High Court has ruled. The case concerned mistakes that did not form terms of the contract.

The ruling confirms that a contract is not invalid just because one of the parties is mistaken about its basis. A contract can be invalidated if one of its actual terms is a mistake, but not if the mistake simply forms a part of one party's understanding, the court said.

The High Court heard a shipping dispute in which Norwegian oil and gas company Statoil and US commodity trader Louis Dreyfus argued about the fees to be paid for using a container ship for longer than stated in a contract. Those fees are calculated on a per day basis and are called demurrage.

Statoil chartered a ship to transport liquid propane gas to Mexico under order by Louis Dreyfus (LD), which had a buyer for the gas there. The ship was delayed in offloading its cargo, which it eventually did in three batches, the last on 24th October 2006.

It was Statoil's job to deal with the ship owner in relation to payment for that delay. Statoil's Ole Rostrup made a mistake when calculating the demurrage and sent a bill to LD for demurrage only up to 13th October. The two companies agreed a much smaller amount than that which was really due.

LD sought to uphold that contract, while Statoil claimed that it could not stand because it was based on a mistake.

LD's Ray Hodge admitted in court that he knew that Rostrup had got the dates wrong. He said it was discussed at his company and it was decided not to correct Rostrup over the bill for $103,527.84, which Statoil later calculated should have been for $549,360.96.

In fact LD charged its gas buyer almost the entire actual demurrage charge. It asked its buyer for $539,361.11 to cover demurrage even as it insisted to Statoil that it would only pay $103,527.84.

A contract can be invalid if the terms of the contract are themselves a mistake. This is called a unilateral mistake and it invalidates a contract because the two parties are said to have never actually agreed on something crucial, so a contract cannot have been concluded.

"The general rule at common law is that if one party has made a mistake as to the terms of the contract and that mistake is known to the other party, then the contract is not binding," said Mr Justice Aikens in his ruling. "The reasoning is that although the parties appear, objectively, to have agreed terms, it is clear that they are not in agreement."

"Therefore the normal rule of looking only at the objective agreement of the parties is displaced and the court admits evidence to show what each side subjectively intended to agree by way of terms. If it is clear from such evidence that there was not consensus, then there can be no contract, because the parties have not truly agreed on the terms. Some of the cases talk of such a contract being 'void', but I think it is clearer to say that there was never a contract at all," he said.

Statoil argued that this was the situation in its case against LD, but Mr Justice Aikens disagreed.

"If one party has made a mistake about a fact on which he bases his decision to enter into the contract, but that fact does not form a term of the contract itself, then, even if the other party knows that the first is mistaken as to this fact, the contract will be binding," he said.

The Court looked at whether it was a term of the contract itself that the ship had completed offloading its cargo on 13th October, which was a mistaken assumption. He found that that assumption was not actually a term of the contract, and so the law of unilateral mistake did not apply.

"It is true that Mr Rostrup sent to [LD's] Mr Hodge a hard copy of the calculation sheet, which showed that he had put in the information that 'laytime ended' on 13 October 2006. It is also true that Mr Hodge saw this sheet and annotated it with his revised figures before the agreement was reached. But the date for the completion of discharge was not a term of the contract of compromise as to the amount of demurrage due on this sale contract," said the ruling.

Rostrup and Hodge had a later phone conversation whose contents were disputed. Rostrup claimed that Hodge agreed to pay the full demurrage bill, and send Hodge an email and a new invoice immediately, which were not replied to. Hodge later denied that he had made that agreement.

Mr Justice Aikens believed Rostrup over Hodge. He said that while the earlier agreement between Statoil and LD stood because the mistake did not undermine the contract, it was superceded by the oral agreement and so LD must pay the full demurrage bill.