Proving knowledge in unilateral mistake cases

Napoleon Bonaparte is said to have counselled his marshals to never interrupt the enemy whilst it is making a mistake. This advice is of doubtful value in contract negotiation. It has long been the law that in certain circumstances a party will not be held to a contract in respect of which they are mistaken as to its contents. In counterpoint to Napoleon’s strategic advice, in Solle v Butcher[1] Denning LJ gave, as an example of one such circumstance, the case where:

“… one party, knowing that the other is mistaken about the terms of an offer … lets him remain under his delusion and conclude a contract on the mistaken terms instead of pointing out the mistake.”

Many of the leading cases on mistake involve contracts for the sale of land. In the English case of Tamplin v James[2] the purchaser mistakenly considered he was buying two parcels of land, but the contract provided for only one. The leading Australian authority, Taylor v Johnson,[3] considered circumstances in which a vendor had entered into a contract to sell her 10-acre property for $15,000, mistakenly believing the purchase price to be the price per acre.

In the recent case of Toma v Olcorn[4] (Toma), the Victorian Court of Appeal had the occasion to again examine and apply the principles of unilateral mistake in a sale of land contract. The focus of that case (and this article) are the circumstances in which the court was prepared to infer the purchaser knew the vendor was mistaken as to the terms of the contract. It is notable that the relevant mistake arose from the carelessness of the vendor’s solicitor in the course of preparing the sale contract.

As will be explored below, it may be concluded from the decision in Toma that courts in Australia will readily infer knowledge of mistake, in the absence of direct evidence, in order to relieve a party of an obligation it has mistakenly assumed by contract.

The facts

In 2017, Mr Toma as purchaser and Ms Olcorn as vendor entered into a contract for the sale of a 20-hectare rural property. The purchase price was $900,000.

Ms Olcorn had, several years prior, entered into a 99-year lease of a 100-square metre portion of the land with a company associated with a telecommunications provider. A telecommunications tower was constructed. The lease provided for rent of $3535.35 per annum. It also provided, however, for the payment of the total rent payable over the lease term ($350,000) in two instalments in 2012, and Ms Olcorn received both.

In May 2017 Ms Olcorn listed the property for sale through a real estate agent with a price range of $870,000 to $950,000. Mr Toma and his wife were shown around the property by Ms Olcorn and the tower and the lease were briefly discussed, but the duration of the lease and any rent payable were not discussed. Mr Toma made an offer of $870,000 later that day.

Mr Toma again inspected the property (this time with the agent) a few days later. Again the lease was discussed in general terms, but the agent was not able to provide any relevant details.

Following the inspections, Ms Olcorn instructed her solicitor to prepare the relevant contract and disclosure document. Ms Olcorn’s solicitor was provided with a copy of the telecommunications lease and instructed that Ms Olcorn was to retain the money from the lease. Ms Olcorn’s solicitor drafted the following special condition to give effect to these instructions:

The purchaser acknowledges the Lease contained in the contract to Crown Castle Australia Pty Ltd/Vodafone Network Pty Ltd and the continuing rights of the Lessee contained therein. The purchaser further acknowledges that all payments due pursuant to the terms of the Lease have been paid to the vendor/lessor and that no further payments are required to be made by the Lessee under the terms of the Lease.[5]

The solicitor, however, overlooked one of the standard contract conditions which provided for the apportionment on settlement of all income received in respect of the property. The contract and disclosure statement were provided to Mr Toma. The next day, he increased his offer to $900,000. It was accepted by Ms Olcorn several days later and contracts were exchanged.

The day following contract exchange Mr Toma’s solicitor wrote to Ms Olcorn’s solicitor seeking confirmation that the rental under the lease of $385,000 would be adjusted at settlement. If the rental adjustment was accepted the effect would be to reduce the purchase price by $330,000, being 94/99ths of the total rent. A dispute followed, culminating in Mr Toma instituting proceedings for specific performance.

At trial, both parties accepted that there had been a number of discussions prior to the entry into the contract to the effect that there were no further amounts payable under the lease. The critical issue for determination was whether Mr Toma had conducted himself so as to entitle Ms Olcorn to be relieved of her obligations under the contract. That issue was decided in favour of Ms Olcorn.

Relevant principles

The applicable legal principles were not in dispute at trial or on appeal. Both parties accepted the following statement of principle by the High Court in Taylor v Johnson:

“… 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 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.”[6]

Also accepted was the Victorian Court of Appeal’s clarification of that principle in Leibler v Air New Zealand Ltd (No 2) as follows:

“In Taylor v Johnson … the majority referred to the case in which the non-mistaken party deliberately sets out to ensure that the mistaken party does not become aware of the existence of a mistake. But the majority’s reference to this circumstance was plainly not intended to be an exhaustive statement of what amounts to conduct entitling the mistaken party to rectification, even if it constitutes a particularly clear example … In some circumstances, as in the special circumstances of this case, it may be enough that the non-mistaken party chooses to leave the mistaken party under the misapprehension in executing the agreement.”[7]

It is apparent from the above that there are two elements to obtaining relief by reason of mistake namely:

• knowledge of the mistake
• action, or inaction, with a view to obtaining the benefit derived from the mistake

Disposition on appeal

The appeal was concerned solely with the first element, namely finding that Mr Toma was aware that Ms Olcorn was operating under a mistake at the time of entering into a contract. Establishing a person’s state of mind is, of course, notoriously difficult and necessarily reliant on the drawing of inferences from relevant facts and circumstances. That was the case in Toma.

The circumstances emphasised by Mr Toma as establishing that knowledge had not been adequately proven were, first, that it is unremarkable that the benefit and burden of a lease would be adjusted at settlement. Accordingly, it ought not be assumed by a purchaser that a vendor was mistaken of such an adjustment if not expressly informed of the mistake. Secondly, the fact that the contract was drawn by Ms Olcorn’s solicitor was said to be significant.

Thirdly, the trial judge had placed much significance on the letter sent to Ms Olcorn’s solicitors the day after the exchange of contracts. The trial judge had characterised it as a “gotcha”[8] letter, but on appeal Mr Toma argued that it was at least as likely that the sending of the letter was an “obvious and prudent step to take in preparation for settlement”[9] given the quantum of the adjustment.

The Court of Appeal found no error in the trial judge’s reliance on the solicitor’s letter, or the rejection of Mr Toma’s innocent explanation for sending it, particularly in the following circumstances:

• First, the adjustment was significant. The commercial unreality of contract was a powerful factor supporting the conclusion that a mistake has been made and that the unmistaken party was aware of it.
• Secondly, Mr Toma offered $870,000 for the property prior to being informed of the lease, and such a significant reduction in the cash required at settlement was enough to put Mr Toma on notice.
• Thirdly, the property was advertised with a sale price of $870,000 to $950,000 (without reference to any significant reduction).
• Fourthly, the lease was of an unusual nature.

Conclusion

The decision in Toma may in some ways be considered an orthodox application of the principles of unilateral mistake. Toma illustrates equity’s preparedness to intervene to deny a party from taking advantage of another party’s mistake, and the breadth of matters, including conduct subsequent to the relevant transaction, from which a court will be willing to infer knowledge of the mistake.