Can You Be Held To A Contract If You Were Mistaken As To Its Terms?
By Jack Golding, Lawyer, MST Lawyers
What happens if, after entering into a contract, you realise that you were mistaken as to its terms? Can you avoid the contract on this basis? Or will you be held to what you have signed? It depends, said the Court of Appeal in the recent decision of Toma v Olcorn [2019] VSCA 116.
The Telecommunications Lease And The Contract Of Sale
Ms Olcorn owned land at 1480 Wallan-Whittlesea Road, Upper Plenty (Upper Plenty Property).
In April 2012, Ms Olcorn leased a small part of her Upper Plenty Property to a telecommunications company who constructed a telecommunications tower on it. The lease was for a term of 99 years and provided for a total of $350,000.00 in rent (Telecommunications Lease). The full rent was paid to Ms Olcorn in advance in June and July 2012.
In May 2017 Ms Olcorn offered the Upper Plenty Property for sale.
On 16 June 2017, Mr Toma inspected the Upper Plenty Property and made an offer of $870,000.00. Ms Olcorn instructed her solicitor to prepare a contract of sale and a section 32 statement on the basis that Ms Olcorn would retain all of the rent she had received under the Telecommunications Lease.
The contract of sale prepared by Ms Olcorn’s solicitor contained a special condition dealing with the Telecommunications Lease. However, Ms Olcorn’s solicitor had overlooked the effect of a general condition of the standard form contract that she had used.
The effect of this error was that the $350,000.00 Ms Olcorn had received in rent under the Telecommunication Lease would need to be adjusted at settlement. As a result, the price Mr Toma would be required to pay to Ms Olcorn at settlement would be reduced by around $330,000.00.
On 20 June 2017 Ms Olcorn’s solicitor provided the contract of sale and section 32 statement to Mr Toma. After receiving these documents, Mr Toma increased his offer from $870,000.00 to $900,000.00. Ms Olcorn accepted this offer and contracts were subsequently exchanged on 26 June 2017.
On 27 June 2017 (the day after contracts were exchanged) Mr Toma’s solicitor wrote to Ms Olcorn’s solicitor requesting confirmation that the rent Ms Olcorn had received under the Telecommunications Lease would be adjusted at settlement.
Ms Olcorn refused to complete the sale on this basis, and Mr Toma sought an order compelling her to do so (known as an order for “specific performance”). Ms Olcorn counterclaimed alleging unilateral mistake on the basis that Ms Olcorn had entered into the contract under the mistaken belief that there would be no adjustment of rent at settlement.
Trial And Court Of Appeal Decision
At trial, Judge Macnamara had found that:
“First thing the following morning, [Mr Toma’s] solicitors raised the issue of the adjustment with [Ms Olcorn’s conveyancer]. I accept [counsel for Ms Olcorn’s] submission that this indicated that they and Mr Toma apprehended that there would be a dispute as to the adjustment of the prepaid rent. This action is indicative of a knowledge and belief that the adjustment of prepaid rent was not something which Ms Olcorn or her conveyancer realised would be necessary under the terms of the contract, or were agreeing to undertake. Mr Toma, through his solicitors, moved early because he knew there would be a fight on this subject.
…
I am satisfied, therefore, that Mr Toma was aware that Ms Olcorn was labouring under a mistake, being unaware that the terms of the written contract would require an adjustment of prepaid tower rent. He sought opportunistically to take advantage of the mistake.”
As a result, Judge Macnamara ordered that the contract be rescinded on the basis of unilateral mistake.
In considering whether the contract should be set aside, the Court of Appeal observed the principles in Taylor v Johnson (1983) 151 CLR 422 and Leibler v Air New Zealand Ltd (No 2) [1999] 1 VR 1 that whether a party has a right to rescind a contract on the basis of unilateral mistake depends on the knowledge and conduct of the other party:
“[A] party who has entered into a written contract under a serious mistake about its contents in relation to a fundamental term will be entitled in equity to an order rescinding the contract if the other party is aware that circumstances exist which indicate that the first party is entering into the contract under some serious mistake or misapprehension about either the content or subject matter of that term and deliberately sets out to ensure that the first party does not become aware of the existence of his mistake or misapprehension.”
…
“In some circumstances, …it may be enough that the non-mistaken party chooses to leave the mistaken party under the misapprehension in executing the agreement“
Applying these tests, the Court of Appeal upheld the findings of Judge Macnamara and dismissed Mr Toma’s appeal. In doing so, the Court of Appeal made the following remarks in relation to the factual context of the case:
“It is not contentious that Ms Olcorn had made a serious mistake…In the context, a conclusion that the solicitor’s letter written so soon after contracts were exchanged revealed an awareness of that mistake, kept secret until after the exchange, and likely to result in a dispute as soon as the mistake was exposed, was certainly open to the trial judge…”
Practical Implications
The decision serves as a timely reminder that, while a person who signs a contract will typically be bound by its terms, there are circumstances in which a party can avoid a contract on the basis of mistake.
If you would like advice on any of the issues raised in this article, please email our Dispute Resolution and Litigation team or call 03 8540 0200.
