Mutual mistake

How BC law treats it

Canadian law, including BC law, distinguishes three kinds of mistake. In a mutual mistake, the parties are at cross purposes, each meaning something different. If the terms are so ambiguous that no reasonable person could say which meaning was agreed, no contract is formed. Otherwise the court enforces the meaning a reasonable observer would take. In a common mistake, both parties share the same mistaken assumption. If the mistake is about something fundamental that makes performance essentially different from what was contemplated, the contract may be void (Miller Paving Ltd v B Gottardo Construction Ltd, 2007 ONCA 422). In a unilateral mistake, only one party is mistaken, and relief is generally available only if the other party knew or ought to have known of it. Rectification is a different remedy. Where the parties reached a definite prior agreement but the written document does not record it correctly, the court can rectify the document to match the agreement. In Canada (Attorney General) v Fairmont Hotels Inc, 2016 SCC 56, the Supreme Court of Canada held that rectification corrects how an agreement was recorded, not the agreement itself, and is not available simply because the parties would have chosen a different deal if they had understood its consequences. Where the mistake is unilateral, the party seeking rectification must also show the other party knew or ought to have known of the error. Contracts often allocate risk of mistake through representations, warranties, conditions and entire agreement clauses. Where the contract allocates the risk, the court is unlikely to relieve a party from it.

What it means for your business

Mistake arguments come up when deals turn out differently than expected, such as an asset that does not exist, a price based on wrong figures, or a document that does not say what was agreed. They succeed far less often than business owners hope. Clear drafting, defined terms, accurate schedules and representations about key assumptions are the best protection, and catching a drafting error before closing is far cheaper than a rectification application. Example: A Kelowna company agrees to buy a competitor's equipment, but the signed asset purchase agreement lists the wrong serial numbers for several machines. Because both sides had agreed on the specific machines, the buyer can ask the court to rectify the schedule.

Risks and common mistakes

Calling a shared error a mutual mistake, when the correct category is common mistake. Seeking rescission for a drafting error when the proper remedy is rectification. Using rectification to fix an unexpected tax result rather than a recording error, contrary to Fairmont. Relying on a mistake argument where the contract has already allocated that risk. Using undefined or ambiguous terms that allow each party to read the deal differently.