The doctrine of common mistake will void a contract based on a common and mistaken assumption of material fact. If, however, the contract provides that one party bears the risk of the particular mistake, that party cannot rely on the doctrine to have the contract set aside. One should bear in mind this point, recently emphasized by the Ontario Court of Appeal in Miller Paving Limited v. B. Gottardo Construction Ltd., when agreements are drafted and performed, as well as when mistakes are litigated.
Miller contracted to supply to Gottardo paving materials used to build a highway extension. In late 2001, the parties signed a mutual release in which Miller acknowledged receiving payment in full for all materials supplied. Unfortunately for Miller, this acknowledgment was a mistake. A month later, Miller discovered that it had failed to bill for approximately $500,000 in materials delivered to Gottardo between June and September 2001. Miller sued for that unpaid amount, but the trial court denied his claim.
The appeal court upheld the trial court’s decision, holding that Miller could not invoke the doctrine of common mistake because the mutual release allocated the risk of underpayment to Miller.
In reaching this conclusion, the appeal court relied on:
- Miller’s acknowledgment and agreement in the mutual release that full payment had been received; and
- the parties’ billing practice, which made it Miller’s responsibility to determine what material was supplied and invoice the correct amount.
Reading the contract within the factual matrix of the billing practices, the court held that Miller bore the risk that payment in full had not been received. Therefore, the doctrine of common mistake did not apply.
The court went on to state that, even assuming the doctrine of common mistake could be invoked, this release could not be set aside because:
- applying the common law approach to the doctrine, Miller could not show that the subject matter of the contract became "essentially different from what it was believed to be" as a result of the common mistake; and
- under the equitable doctrine, the fact that the mistake was due to Miller’s own gross oversight was fatal.
Although the court considered the equitable doctrine of common mistake as one of the alternative bases of its decision, the court noted that it was not deciding whether a 2003 English Court of Appeal decision abandoning the equitable version of the doctrine should be followed. Nevertheless, the court did comment that there was "good reason" not to abandon the equitable doctrine: its flexibility allows for the correction of unjust results in diverse circumstances.
McCarthy Tétrault Notes:
While the court recognized the importance of common mistake as a corrective tool, this case illustrates that mutual misapprehension of facts is not necessarily sufficient for the application of the doctrine. Rather, the first issue to determine is whether the contract assigns responsibility for the mistake to the aggrieved party. If so, no redress is available.
Therefore, when drafting agreements, consider whether common mistakes are likely to arise in performance and clearly allocate responsibility for such mistakes to the counter-party, if possible.
Furthermore, be aware of the parties’ practices, such as the manner in which they bill, because the court may consider these practices, in addition to the language of the contract, when assessing the allocation of responsibility for the mistake