What are the effect of (a) mistake of fact and (b) a mistake of law on a contract?

Question: What are the effect of (a) mistake of fact and (b) a mistake of law on a contract? Illustrate your answer.

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Answer

Effect of Mistake of fact

Section 20 of The Indian Contract Act, 1872 states: an agreement is said to be void where both the parties to an agreement are under a mistake as to a matter of fact essential to the agreement.

The provision is based on the famous maxim “Ignorantia Facti Excusat” which means that the Ignorance of fact excuses. Therefore under An agreement vitiated by mutual mistake of fact essential to the agreement is void. Where a mistake is not mutual, or not of fact, or is not essential to the agreement, the agreement is a contract binding on the parties. When a mistake vitiates the agreement, the obligation of restitution arises under Section 65.

In addition, other equitable remedies are available in the form of defense to a suit or specific performance, and rectification, where the entire agreement is not vitiated by the mistake, but there is a mistake as to some terms, or where the intention of the parties is not reflected in the document incorporating the contract.

For example: ‘X’ agreed to buy a TV from ‘Y’ based on his letter of intent in which the price mentioned was Rs 10,000/- instead of 10 lakhs due to a typing error. The said agreement is considered void due to a mistake as to the quantity of the subject matter.

Restitution: Section 65 provides that when an agreement is discovered to be void, any person who has received any advantage under the agreement is bound to restore it, or to make compensation for it, to the person from whom he received it.

Specific Performance: A defendant may set up a variation in a suit of specific performance, whereby a mistake of fact, the written contract of which performance is sought by the plaintiff, is in terms or effect different from the parties had agreed to, or does not contain all the terms agreed to between the parties on the basis of which the defendant entered into the contract.

Rectification: There may be cases where the parties are genuinely agreed, but the language or the terms used by them in the written document do not convey the true meaning or reflect their true intention. This is not a mistake rendering the agreement void, but a mistake in expression capable of being rectified, if not mutually, with the assistance of the court. Section 26 of The Specific Relief Act, 1963 enables such rectification. This relief is available for correcting the language of an instrument for making it in accord with the true intention of the parties by reason of a mutual mistake of the parties.

Effect of Mistake of Law: Section 21 lays down provision for Effect of mistakes as to law: A contract is not voidable because it was caused by a mistake as to any law in force in India, but a mistake as to a law not in force in India has the same effect as a mistake of fact.

The section provides that a mistake of law in force in India does not make a contract voidable, but a mistake of foreign law is to be treated as a mistake of fact. For example, ‘A’ and ‘B’ make a contract grounded on the erroneous belief that a particular debt is barred by the Indian Law of Limitation; the contract is not voidable.

A person cannot go back upon what he has deliberately done or excuse himself from liability of wrongful act or offense, merely because he alleges that he acted under a misapprehension of law. It is his business to know, by taking professional advice or otherwise, so much law as concerns him for the matter he is transacting. A mistake of law does not universally or generally invalidate transactions in which it occurs. However, the UNIDROIT Principles, equate a mistake of fact with that of law.

While mistake as to general law is no ground for relief: if the mistake of law is of such a kind that it is mixed up with certain specific facts relating to a particular individual…that…as a combined effect of a party’s view of the law and facts, he made a mistake at the time of entering the transaction as to the nature of his pre-existing private right, it may be said that such a mistake is not a pure mistake of law. For example: A man’s promise to buy that which, unknown to him, already belongs to him is not to be made binding by calling his error as to the ownership, a mistake of law.

Applying the effect of aforesaid sections, in a case of Seth Srenikbhai Kasturbhai And v. Seth Chandulal Kasturchand [AIR 1997 Pat 179] where a mortgage bond provided that if the mortgagor failed to redeem the mortgaged property within eight years, the mortgagee should be the owner of the property, and the mortgagor being unable to redeem, executed an absolute transfer of the property to the mortgagee, and put him in possession, it was held that the purchaser from the mortgagor of the equity of redemption subsequent to the date of the transfer was not entitled to redeem, even though the mortgagor might have been ignorant of his right to redeem the mortgage, notwithstanding the clause in the mortgage precluding him from doing so.

Thus to conclude, the Contract Act makes a distinction between the effect of mistake of law and mistake effect on agreements entered into between parties. Section 20 of The Contract Act,1872 declares, where both the parties to an agreement are under a mistake as to a matter of fact essential to the agreement, the agreement is void; whereas Section 21 states that a contract is not voidable because it was caused by a mistake as to any law in force in India. Mistake as to foreign law is treated as a mistake of fact.

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Law of Contract Mains Questions Series: Important Questions for Judiciary, APO & University Exams

1. Law of Contract Mains Questions Series Part-I
2. Law of Contract Mains Questions Series Part-II
3. Law of Contract Mains Questions Series Part-III
4. Law of Contract Mains Questions Series Part-IV
5. Law of Contract Mains Questions Series Part-V
6. Law of Contract Mains Questions Series Part-VI
7. Law of Contract Mains Questions Series Part-VII
8. Law of Contract Mains Questions Series Part-VIII
9. Law of Contract Mains Questions Series Part-IX
10. Law of Contract Mains Questions Series Part-X