A mistake in your contract? Oops…..

You probably know better than to making mistakes in your contracts. A contract is a legally binding agreement between parties. But let’s face it: making mistakes happens to the best of us! That’s why it is important you are well aware of the contents before signing what is put in front of you.

That being said, within your business you probably process a lot of contracts. And vice versa: there will most likely be a variation of contracts important for your business to function. As such, it may happen you only notice a mistake áfter you have applied your signature. Especially in this era, where you are frequently asked to sign documents electronically. Mistakes are easily overlooked. So, what happens if you notice a mistake in hindsight and more importantly: how do you rectify a mistake?

Within contract law, a mistake is defined as an “erroneous meaning of words or facts”. There are dozens of ways businesses can mishandle contracts, from lacking any sort of contract management to neglecting to utilise contracts whatsoever. However, when it comes to the technical type of “mistake,” here are the three most common issues you need to watch out for in (international) contracts: unilateral mistakes, mutual mistakes & common mistakes.

Let’s look at them a little closer:

Unilateral Mistakes

These are by far the most common mistakes. They can be serious! These mistakes occur when one party is misguided as to the terms of the agreement. Most of the times the mistake is simple and fixable This misguiding could however also be the result of gross negligence or, worst, malicious intent by your contractual party.

Only under certain conditions, unilateral mistakes are rescindable. It is possible to take back an agreement based on a clear clerical fault, as long as this fault is not due to gross negligence. Contracts with mistakes so serious they are outrageous and agreements where one party clearly and intentionally misguided the other or else allowed the other party to continue with false information are also rescindable. These mistakes can be remedied through contract reformation and contract revocation.

Important: with unilateral mistakes only one party is misguided! The misguidance should give the other party an advantage during negotiation and bargaining phase. Is it possible to prevent such a mistake? You may certainly minimise the risk by working with a lawyer when drafting and reviewing your contracts.

Mutual mistakes

Opposite the unilateral mistake stands the mutual mistake: occurring when both parties are misguided about the same facts within the terms of their agreement. The mutual mistake does not empower one party over the other, but sees both parties at cross-purpose.

Usually, when parties discover a mutual mistake, it is in everyones best interest to void the contract and create a new agreement. That way, you can be more specific about certain material parts of the contract. And avoid making the same mistake. Basically, as both parties have a different understanding of the same material facts, there was no agreement to begin with, hence you are allowed to void the contract.

Again: drafting, reviewing and negotiating contracts together with a lawyer gives you a good possibility of avoiding this kind of mistake.

Common mistakes

Though comparable in the fact that mutuality is key here, this mistake differs substantially from the mutual mistake.  For a mutual mistake to occur, there must be an error in the material facts of the contract, but for a common mistake to occur, both parties must be confused with a fundamental assumption about the subject matter.

While there is no genuine agreement when there is a mutual mistake, with a common mistake, agreement can occur. It is simply that both parties are incorrect in their beliefs.

Think, expensive jewellery: when a party tries to resell a masterpiece and discovers that instead of it being a rare and valuable piece, it is in fact not. The initial seller was also misled, and that is where the common error occurs.

Technically, there is no breach of contract or operative mistake. Due to misrepresentation however, it is possible to rescind the agreement within an appropriate time-frame. Yet again: to avoid common mistakes, make sure to consult a lawyer when contracting!

While it happens to the best, avoiding mistakes in contracts is the best way of protecting your business.

Sources:
Thomson Reuters, Practical Law
HG.Org Legal Resources