Chapter 3 - Mistake (Absence of Consensus) PDF

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WORKSHEET 3 (Chapter 3)Mistake (Absence of Consensus)3. INTRODUCTION####### Chapter 1 introduced the dual basis of contracts in modern South African law####### i. The primary basis is the will theory –####### ▪ Which requires actual subjective agreement between the parties for####### contractual lia...

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WORKSHEET 3 (Chapter 3) Mistake (Absence of Consensus)

REQUIREMENTS FOR A VALID CONTRACT Contractual

CONSENSUS

Legality Formalities

capacity

Possibility and certainty

3.1. INTRODUCTION Chapter 1 introduced the dual basis of contracts in modern South African law i.

The primary basis is the will theory – ▪

Which requires actual subjective agreement between the parties for contractual liability to arise.

ii.

The secondary basis is the reliance theory – ▪

Which provides that when the parties are not in agreement, contractual liability nevertheless may arise on the basis that the one party led the other party into a reasonable belief that consensus had been reached.

•

Mistake (in contract) refers to the situation where – ▪

A contracting party acts while under an incorrect impression regarding some or other fact that relates to and affects the contract between the parties.

•

An important distinction is drawn between – i. ii.

A mistake that vitiates (destroys) actual consent to the contract One that does not affect consensus as such but which, nevertheless, may render the contract voidable (rescindable).

•

For present purposes = ▪

A mistake or error generally may be said to exist – ▪

Where there is disagreement or dissensus between the parties at the stage of possible conclusion of a contract and where one or both of the parties is unaware of the disagreement NOTE: MISTAKE

•

Mistake = ▪

Party acts under an incorrect impression regarding fact that relates to and affects the contract.

▪

It exists where: i) There is disagreement (or dissensus); ii) At stage conclusion of contract; iii) Where one (or both) party is unaware of the disagreement

•

Distinction between – 1.

Mistake that destroys actual consent (Material)

2.

Mistake that does not destroy consent – but makes contract voidable (Non-Material)

IGNORE

3.2. CLASSIFICATION OF A MISTAKE

•

MISTAKE – ▪

•

Sub-Pars 3.2.1 and 3.2.2

•

Table 3.1

(a) At the stage of conclusion of a possible contract

One party makes an error

(b) That the parties are unaware of

OR ▪ •

There is a disagreement

Sometimes it is caused by the other party’s improper conduct: 1.

Misrepresentation

2.

Duress

3.

Undue influence

4.

Economic bribery

5.

Consumer Protection Act section 40:

Can someone be excused from contractual liability for all mistakes

Unconscionable Conduct

or errors, however negligible? •

Consensus is required for the conclusion of a contract

•

Where a party makes a mistake (is in error) = consensus cannot exist

3.2.3

Material and non-material mistake MATERIAL MIASTAKE Where a party makes a mistake that is – i.

Relevant

ii.

material

NON-MATERIAL MISTAKE If the error is not material – ▪

but it is caused by the other party’s improper conduct

= the contract is void because consensus is

= the contract becomes voidable.

absent.

If we accept that actual agreement is the primary basis of contractual liability in accordance with the will theory – 1. The first question that arises when determining the existence of a valid contract is – ▪

Whether the parties in fact reached consensus ad idem.

2. lf consensus is reached (and provided the other requirements for a valid contract are met) = A legally binding contract arises. 3. If the parties are not in agreement – ▪

Then no contract will exist on the basis of the will theory.

4. Unless the contract can stand on the secondary basis of reliance – ▪

It will be void ab initio.

2

The distinction between a material (operative or essential) mistake and a non-material mistake

•

is crucial to the question of consensus –

MATERIAL MIASTAKE 1.

NON-MATERIAL MISTAKE

Is an error that vitiates or

1.

negates actual consensus

because it does not relate to an element of consensus.

between the parties. 2.

Does not exclude actual agreement between the parties

2.

A valid contract will still arise, although it may be voidable

Must relate to or exclude an

(rescindable) if consensus has been obtained in an improper

element of consensus.

manner (misrepresentation, duress, undue influence, or commercial bribery)

•

The distinction between a material and non-material error is vital in determining the

appropriate resolution to a situation where a party was mistaken about something when entering into a contract –

MATERIAL MIASTAKE i.

NON-MATERIAL MIASTAKE

The issue is one of dissensus or true ‘mistake’

A consensual contract exists and there

and the secondary principles of reliance have to

is no need to apply the principles of

be applied to determine whether a contract

reliance because the contract already

based on reliance has arisen

has a legal basis (will theory).

OR Whether the mistaken party may be exonerated

ii.

from contractual liability because the potential contract lacks a legal basis.

•

It is clear that materiality has a very specific connotation in the context of mistake and it should not be confused with materiality as applied to other areas of the law of contract. NOTE: MATERIAL VS NON-MATERIAL MISTAKE

▪

A material mistake is: i) Relevant ii) Material. It results in the contract being void.

▪

A non-material mistake is: not material but results from other party’s improper conduct, the contract is voidable.

▪

To determine whether contract is valid = 4 step enquiry (1. Was consensus reached? 2. If YES, a valid contract arises. 3. If NO, then no contract exists. 4. Unless contract can stand on secondary basis, it will be void ab initio).

▪

Distinction between Material and Non-Material Mistake: Is crucial to the question of consensus. Each has different effects.

▪

The distinction is also vital when: There is a situation where a party was mistaken about something entering into the contract. Each has a different effect on the situation – must be able to determine whether it is material OR non-material.

NOTE: MATERIAL MISTAKE (ERROR) If, for some reason or other, the parties are not in agreement about one (or more) of the elements of consensus, there is a material mistake.

The elements of consensus: The parties must: i)

Seriously intend to contract.

ii)

Be of one mind as to the material aspects of the contract.

iii)

Be conscious of the fact that their minds have met.

Person makes a mistake regarding: i.

Animus contrahendi ▪

If a contracting party lacks the intention to be legally bound by an agreement (animus contrahendi) = there can be no consensus.

▪

There are various reasons why a party may lack the intention to be bound in law by an agreement.

▪

Mondorp Eiendomsagentskap (Edms) Bpk v Kemp en De Beer ▪

The appellant’s representative signed a document that the respondent alleged amounted to an undertaking to pay certain moneys to the respondent.

ii.

▪

The appellant denied that the document contained such an undertaking and contested its liability.

▪

The majority of the court found that no contract between the parties had come into existence.

Material aspects of the contract ▪

The parties must be ad idem regarding the consequences they intend to create – namely, the persons between whom the obligations are to be created and the content of the obligations (the performance(s) to be rendered) – These are the material aspects.

▪

A mistake regarding the parties to a contract will usually be material.

▪

If a party inadvertently accepts the offer of one party, while it actually intended to accept the offer of a completely different party = the resultant error will be material.

▪

The most common of operative mistakes are those that relate to the material terms of contracts and, more specifically, the aspect of contractual performance.

▪

For example, the parties may be of different minds regarding the subject matter of the contract. (Error in Corpore)

▪

Allen v Sixteen Stirling Investments (Pty) Ltd ▪

The plaintiff believed he was purchasing the property pointed out to him by the defendant’s agent.

▪

However, the deed of sale that he signed referred to another property, which the plaintiff did not intend to buy. (The parties were not in agreement as to what was being bought and sold).

▪

Generally speaking, any mistake regarding a contractual clause that permits a party unilaterally to vary an aspect of performance =will be material.

4

Consciousness of consensus

iii.

▪

An integral element of consensus and the will theory is that the parties must not just have coinciding declarations of intention

▪

Must also be aware of each other’s intention for a consensual contract to arise.

▪

A mistake that precludes conscious agreement between the parties will be material.

▪

The parties’ declarations of intention are usually expressed in the form of an offer and an acceptance.

▪

However, i) The offeree must be aware of the offer before he can accept it AND ii) The offeror must be aware of the acceptance for a true the meeting of the minds (concursus animorum) to occur.

▪

Bloom v American Swiss Watch Co. ▪

The respondent promised a reward to any person who could provide information leading to the arrest of thieves who had stolen jewellery from it.

▪

The appellant provided such information while he was unaware of the promise of reward. Later, the appellant became aware of the offer and proceeded to claim the reward from the respondent.

▪

The court found for the respondent – ▪

It held that the appellant could not accept an offer until he knew of it; there was therefore no consensus and hence no contract.

▪

If, for some reason or other, the parties are not in agreement about one (or more) of these elements, there is a material mistake.

NOTE: NON-MATERIAL MISTAKE ▪

Non-material mistakes do not affect an element of consensus.

▪

If the parties are ad idem as to the material aspects of the proposed contract, a consensual contract comes into being.

▪

Mistake of this nature relates purely to the reason or motive of the mistaken party for entering into an agreement and hence it is usually referred to as an error in motive.

▪

It should be stressed that just because the parties have reached consensus and a contract has arisen does not necessarily mean that a mistaken party is without legal recourse.

▪

If the mistake in motive was induced by the misrepresentation of the other party – ▪

The mistaken party may have a remedy (provided the requirements for the particular form of misrepresentation have been complied with).

▪

Diedericks v Minister of Lands ▪

The court found that the defendant’s mistake related to its motive for making the offer and did not exclude mutual assent (consensus) between the parties.

▪

Consequently, a valid contract existed.

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3.2.4 Traditional classification of material and non-material mistake ERROR IN NEGOTIO: Nature of The Contract ▪ ERROR IN CORPORE: Subject Matter of The Contract ▪

This is a material mistake relating to the true nature of the contract (the juristic act) concerned.

This is a material mistake concerning the subject matter of the

Khan v Naidoo

contract (the object of the performance). ▪

▪

The most prominent example is where property is purchased,

There, the appellant was illiterate and signed an agreement as surety for the debt of her son while

and the parties have completely different properties in mind.

under the impression that the document had to do Maresky v Morkel ▪

with the transfer of property to her. ▪

The respondent was under the impression that he was

nature of the juristic act involved.

purchasing property at site A, because of an advertisement in ▪

a newspaper to that effect. ▪

▪

The appellant was clearly mistaken as to the real

Since such a mistake will have a bearing on the

The appellant’s agent failed to point out to him that the

performance(s) involved, it may be regarded as an

property was in fact situated at site B.

example of error in corpore.

The court found that the respondent’s mistake was in corpore, which vitiated his consent to the contract.

ERROR IN SUBSTANTIA/QUALITATE: The Characteristics/Qualities of The Performance

ERROR IN PERSONA: The Identity of The Other Person(s) ▪

This is a (usually material) mistake regarding the identity

▪

material in our law.

of the other party to the contract. ▪ Kok v Osborne ▪

It is a mistake regarding an attribute or characteristic of the subject matter of the contract (object of performance) that is generally not regarded as material.

The defendant believed that he was selling his property to the plaintiff and another party jointly, whereas he was

Traditionally, this kind of mistake has not been seen as

Trollip v Jordaan

in fact only contracting with the plaintiff as purchaser. ▪

The court found that the defendant was mistaken as to

▪

terms of a deed of sale that correctly reflected the

the identity of the party or parties with whom he was

boundaries and extent of the farm.

contracting and that there was therefore dissensus. ▪

However, the courts have complicated matters: at

The appellant purchased a farm from the respondent in

▪

The appellant was misled into believing that the farm included more afforested land than it did because the

times, they have indicated that an error in persona is

respondent’s agent had pointed out the boundaries of the

material only if the identity of a party is of vital

farm incorrectly. importance to the mistaken party. ▪

This approach of the courts has also been linked to the

▪

The majority of the court found that the appellant’s mistake was not in corpore.

notion that only mistakes that play a material role in the decision of the mistaken party to enter into a contract

▪

The court’s approach was that if the parties had the same performance in mind, the mistake could not be one in

can be regarded as legally relevant.

corpore. ▪

This decision implies that error in substantia is not regarded as material in our law.

6

IGNORE

Error in corpore Error in negotio Error in persona Error in substantia/ qualitate Error in motive

Error iuris

Mistake as to subject matter of the contract Mistake as to nature of the contract Mistake as to the identity of party to the contract Mistake as to attributes or characteristics of subject matter Mistake as to party’s reasons for entering into the contract Mistake as to the law relating to some aspect of the transaction

•

Sub-Par 3.2.5

•

Pars 3.3 and 3.4

Material Material Sometimes Material Not Material

Not Material Material (only if relates to terms of agreement, rather than motive)

Even if it is one of these categories, it will not be sufficient to negate consensus, UNLESS it is also a iustus error NOTE: MISTAKE (IN CONTEXT) ▪

What is a mistake? = A situation where a contracting party acts while under an incorrect impression regarding fact that relates to contract.

▪

When does it exist? = Where there is a disagreement between the parties at the stage of conclusion AND where party (or both) is not aware.

▪

There are (2) two types of mistake = 1.

Material which destroys consensus. It must be i) Relevant AND ii) Material

2.

Non-Material which does not destroy consensus but may make contract voidable – caused by other party improper conduct.

▪

When determining the existence of a valid contract = 4 step enquiry [Sub-par 3.2.3]

▪

Distinction of both categories = crucial to the question of consensus (Material destroys consensus and must relate to element of consensus; Non-Material does not destroy consensus, voidable contract arises)

▪

In a situation where a party was mistaken about something when entering into a contract = must take note of effects of both types.

▪

Material mistake = occurs when the parties are not in agreement on one (or more) of the 3 elements of consensus (must understand how they apply at Case Law) – [Note: Material Mistake (Error), Worksheet 3]

▪

Non-Material mistake = Mistake of this nature relates to the motive of the mistaken party.

▪

There are (6) categories of mistakes. Depending on category, either Material OR Non-Material.

▪

1.

Corpore = The object of performance (Land, Car, Tutorial Lessons – think of X and Y from Worksheet 2)

2.

Negotio = The juristic act (signing of contract)

3.

Persona = Identity of party contracting with (X thinks contracting with Y but actually contracting with Z)

4.

Substantial/Qualitate = Attributes or characteristics of subject matter (want a gold chain, receive a gold-plated chain)

5.

Motive = reasons for entering contract

6.

Iuris = Some aspect of the transaction

None of the categories above can will be sufficient to negate consensus – UNLESS it is iustus error (reasonable and material).

3.5. THE SUBJECTIVE APPROACH AS QUALIFIED BY ESTOPPEL AND QUASI-MUTUAL ASSENT 3.5.1 •

Estoppel Estoppel Raiser has a reasonable belief in a misrepresentation made by the Estoppel Denier and relies on this misre...