Mistake of Fact and Mistake of Law

"(a) A agrees to sell to B a specific cargo of goods supposed to be on its way from England to Bombay. It turns out that, before the day of the bargain, the ship conveying the cargo had been cast away and the goods lost. Neither party was aware of these facts. The agreement is void.

(b) A agrees to buy from B a certain horse. It turns out that the horse was dead at the time of the bargain, though neither party was aware of the fact. The agreement is void.

(c) A, being entitled to an estate for the life of B, agrees to sell it to C. B was dead at the time of the agreement, but both parties were ignorant of the fact. The agreement is void."

Section 21:

"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."

Its illustration:

"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."

Section 22:

"A contract is not voidable merely because it was caused by one of the parties to it being under a mistake as to a matter of fact."

Broken down: the three rules

Rule one, section 20: bilateral mistake of fact, essential to the agreement, is VOID

Three requirements, all necessary.

1. Both parties are mistaken. This is what "bilateral" or "common" mistake means. A mistake by one alone is section 22's case.
2. The mistake is as to a matter of FACT, not of law.
3. The fact is ESSENTIAL to the agreement. It must go to the root of the bargain, not to some incidental matter.

The recognised categories of essential mistake are three, and all three appear in the illustrations.

• Mistake as to the existence of the subject matter. The horse is already dead, the cargo already lost, the life estate already fallen in. Illustrations (a), (b) and (c).
• Mistake as to the identity of the subject matter. The parties are each thinking of a different thing, so there is no consensus ad idem under section 13.
• Mistake as to the possibility of performance. Where performance was physically or legally impossible from the outset. This overlaps with the first paragraph of section 56, which declares void an agreement to do an act impossible in itself. See [Impossibility of Performance, and Frustration].

What is NOT essential. Value, by the Explanation. Also quality, generally, and the private motive of a party. A person who buys a painting both parties believe to be by a minor artist, which turns out to be a masterpiece, has no relief: the mistake was as to value.

Rule two, section 21: mistake of Indian law does not help; foreign law counts as fact

The maxim is ignorantia juris non excusat, ignorance of the law is no excuse. Everyone is taken to know the law in force in India, so a contract made on a wrong view of it stands. The illustration is exactly that: parties who wrongly believe a debt is time barred are held to their contract.

But a law not in force in India is treated as a matter of fact. Nobody is expected to know the law of Singapore or of France, so a mistake about it is a mistake of fact and, if bilateral and essential, brings section 20 into play.

Do not confuse section 21 with section 72. Section 21 says a contract is not voidable for a mistake of Indian law. Section 72 says money paid by mistake must be repaid, and the Supreme Court has held that the word "mistake" there covers mistake of law as well as of fact.

Sales Tax Officer, Banaras v. Kanhaiya Lal Mukundlal Saraf, AIR 1959 SC 135.

Facts. A firm paid sales tax on forward transactions under assessment orders. The levy was afterwards held ultra vires by the High Court, and the firm sought a refund. The authorities resisted on the grounds that the payment had been made under a mistake of law, that it was voluntary and unprotested, and that the money had been spent.

Held. The word "mistake" in section 72 comprises within its scope a mistake of law as well as a mistake of fact, and money paid under a mistake of law is recoverable, subject to defences such as estoppel, waiver and limitation. Equitable considerations cannot be imported where a clear provision entitles a party to relief, so the spending of the money made no difference.

Why it matters here. It marks the boundary of section 21. A mistake of Indian law will not undo the contract, but money paid under such a mistake can still be recovered under section 72, which is a quasi contractual claim and not a contractual one.

Rule three, section 22: unilateral mistake does not avoid the contract

Where only one party is mistaken about a fact, the contract stands. The word "merely" is doing work: the contract is not voidable merely because of the one sided mistake, which leaves room for the case where the mistake was caused by the other party's fraud or misrepresentation, in which case sections 17, 18 and 19 apply on their own terms.

There is one situation the courts treat differently, and it is worth a line. Where the unilateral mistake is as to the identity of the person contracted with, and identity was material, there may be no consensus ad idem at all under section 13, so no agreement comes into existence. That is a section 13 point rather than a section 22 exception, and it is how the classic identity fraud problems are analysed.

Consequences: section 65

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

So the parties to an agreement void under section 20 are not left where they stand. Money paid comes back; goods delivered are returned or paid for. See [Consequences of Rescission, and Restoration of Benefit].

The three rules in a table

A worked example

Naveen agrees to buy from Ojas a consignment of Alphonso mangoes lying in a cold store in Ratnagiri, for eight lakh rupees. Work through five versions.

• Unknown to both, the cold store burnt down the previous night and the mangoes were destroyed. Both parties are mistaken as to the existence of the subject matter, which is essential. Section 20: the agreement is void. Any advance paid is recoverable under section 65.
• Ojas has two consignments, one Alphonso and one Kesar. He means the Kesar and Naveen means the Alphonso. No consensus ad idem under section 13, and a bilateral mistake as to the identity of the subject matter. Void under section 20.
• Both believe the mangoes are worth twelve lakh rupees; in fact they are worth five. The Explanation to section 20 applies: an erroneous opinion as to value is not a mistake of fact. The contract stands.
• Naveen alone believes the consignment is Alphonso, and Ojas has said nothing to suggest it. A unilateral mistake of fact. Section 22: the contract is not voidable. If Ojas had said it was Alphonso, honestly or dishonestly, sections 18 or 17 would apply instead.
• Both believe an export licence is unnecessary because they misread the Indian rules, and it is required. A mistake as to a law in force in India. Section 21: the contract is not voidable. Had they misread the import rules of the United Arab Emirates, that would be a foreign law and so a mistake of fact.

What it does NOT mean

"Any mistake makes the agreement void." Only a bilateral mistake as to a matter of fact essential to the agreement.

"Mistake makes the contract voidable." It does not. Where it operates it makes the agreement void; where it does not operate it leaves the contract fully binding. Mistake is the only one of the five factors in section 14 that never produces a voidable contract.

"I paid too much, so I was mistaken." The Explanation to section 20 forecloses it. An erroneous opinion as to value is not a mistake of fact.

"Ignorance of the law is always irrelevant." Not always. Section 21 concerns the contract; section 72 allows money paid under a mistake of law to be recovered, on Kanhaiya Lal. And a mistake of foreign law counts as one of fact.

"A unilateral mistake never matters." Section 22 says the contract is not voidable merely for it. Where the mistake was induced by the other party, or where it goes to the identity of the person contracted with so that no agreement was ever reached, the analysis differs.

Quick revision

• s.20: bilateral mistake as to a matter of fact essential to the agreement makes it VOID. Categories: existence, identity, and possibility of the subject matter. Illustrations: the lost cargo, the dead horse, the fallen life estate.
• Explanation to s.20: an erroneous opinion as to value is not a mistake of fact.
• s.21: mistake as to a law in force in India does not make the contract voidable, ignorantia juris non excusat; a mistake as to a foreign law has the same effect as a mistake of fact.
• s.22: unilateral mistake of fact does not make the contract voidable.
• s.65: where an agreement is discovered to be void, an advantage received must be restored or compensated for.
• s.72 and Kanhaiya Lal, AIR 1959 SC 135: "mistake" in s.72 includes a mistake of law, so money paid is recoverable even though the contract itself stands under s.21.
• Mistake is the only factor in s.14 that makes an agreement void rather than voidable.

Test yourself

1. When does mistake make an agreement void? Under section 20, where both parties are under a mistake as to a matter of fact essential to the agreement. The mistake must be bilateral, must be one of fact rather than of Indian law, and must go to the root of the bargain, typically the existence or identity of the subject matter or the possibility of performing it.

2. Is a mistake as to value a mistake of fact? No. The Explanation to section 20 provides that an erroneous opinion as to the value of the thing which forms the subject matter of the agreement is not to be deemed a mistake as to a matter of fact, so the agreement stands however badly one party has judged the bargain.

3. What is the effect of a mistake of law? Under section 21 a contract is not voidable because it was caused by a mistake as to any law in force in India, on the principle that ignorance of the law is no excuse, and the illustration of parties wrongly believing a debt time barred makes the point. A mistake as to a law not in force in India has the same effect as a mistake of fact and so may bring section 20 into play.

4. Can money paid under a mistake of law be recovered? Yes. In Sales Tax Officer, Banaras v. Kanhaiya Lal Mukundlal Saraf, AIR 1959 SC 135, the Supreme Court held that the word "mistake" in section 72 comprises a mistake of law as well as of fact, so tax paid under an invalid levy was recoverable although paid voluntarily and already spent, subject to defences such as estoppel, waiver and limitation. Section 21 governs the contract; section 72 governs the payment.

5. A sells B a horse that both believe to be alive but which had died before the bargain. Advise B. The agreement is void under section 20, this being a bilateral mistake as to the existence of the subject matter, which is essential to the agreement; illustration (b) is precisely this case. Any price paid is recoverable under section 65, which requires a person who has received an advantage under an agreement discovered to be void to restore it or to make compensation for it.