Introduction
The formation of a contract necessitates a clear agreement between parties, often manifested through offer and acceptance. A fundamental principle in contract law is that agreement must be objectively determined. This means the courts assess the apparent intentions of the parties from the perspective of a reasonable observer, rather than scrutinizing their subjective states of mind. The case of Smith v Hughes establishes this objective approach, dictating that the relevant consideration is what a reasonable person would understand the terms of the contract to be, based on the external communications between the parties. This principle is essential for maintaining certainty and predictability in commercial transactions, ensuring that contractual obligations are based on expressed intentions rather than secret or uncommunicated thoughts. Requirements for a valid contract include offer, acceptance, consideration, and an intent to create legal relations, all assessed objectively. The court evaluates whether there is objective agreement, which is an agreement that is shown through the parties' conduct and communication, not based on their individual intentions.
The Significance of Smith v Hughes
The landmark case of Smith v Hughes (1871) LR 6 QB 597, serves as a crucial illustration of the objective principle in contract law. In this case, the claimant, Smith, offered to sell oats to the defendant, Hughes. The defendant believed he was purchasing old oats, suitable for his racehorses, while the claimant was actually offering new oats. There was no explicit discussion regarding the age of the oats, but Hughes made an assumption. The Court held that a valid contract was formed. The court considered whether a reasonable person in the position of Hughes would have understood the offer from Smith to be an offer of old oats. The court stated that it was not Smith's fault that Hughes was mistaken, so long as Smith did not mislead Hughes into thinking that the oats were old. Smith did not misrepresent the goods, and he made an offer of new oats, and Hughes was bound by that offer, regardless of his misunderstanding. The decision emphasized that if the external communications between the parties demonstrate an agreement, then a contract is valid, notwithstanding any mistaken beliefs held by one or both parties. The case highlighted that a party is bound by the terms that a reasonable person would understand the contract to contain, not by what they subjectively believed.
Unilateral Mistake and its Implications
While the objective approach dominates contract formation, the doctrine of unilateral mistake provides a limited exception. Unilateral mistake arises when one party is mistaken as to a fundamental term of the contract, and the other party is aware or ought to be aware of this mistake. In such instances, the contract may be deemed void. However, to establish a unilateral mistake capable of invalidating a contract, the mistaken party must show more than a simple misapprehension of the terms. The other party must either have actual knowledge of the mistake or, through reasonable diligence, should have been aware of it. The core concept is that the law aims to protect reasonable expectations and not to permit a party to benefit unfairly from the other’s obvious error. The requirements are stringent; it is not enough for one party to make a mistake; the other must have known or be taken to have known of that mistake. This maintains a balance between the objective formation of a contract and protecting a party from exploitation by the other party when there is an evident error.
Centrovinicial Estates plc v Merchant Investors Assurance Company Ltd
The case of Centrovinicial Estates plc v Merchant Investors Assurance Company Ltd [1983] Com LR 158, provides a modern context to the principle established in Smith v Hughes and its exception of unilateral mistake. In Centrovinicial Estates, the claimant, a landlord, mistakenly offered a rental rate of £65,000 per year, instead of the intended £126,000, to the defendant. The defendant accepted the mistaken offer. The claimant sought to void the contract on the basis of unilateral mistake. The Court of Appeal considered the matter of whether the defendant knew or ought to have known about the claimant’s mistake. The court granted the defendant leave to defend the action, rejecting the claimant's application for summary judgment. The court determined that the trial should proceed and that the landlord should have to prove that the other party knew or should have known of the mistake at the time when they accepted the offer. This case demonstrates that a party cannot enforce an agreement when they knew or should have been aware that the other party was operating under a mistake with regards to a term of the agreement.
Application of Objective and Subjective Elements
The analysis of Centrovinicial Estates illuminates the integration of both objective and subjective elements when determining whether a contract is valid. Although contract formation relies heavily on an objective assessment of what a reasonable person would understand from the actions and words of the parties, the concept of unilateral mistake introduces a subjective element. In cases of unilateral mistake, the court considers whether the party who seeks to uphold the contract was, or should have been, subjectively aware of the mistake made by the other party. The court in Centrovinicial Estates clarified that the promisee's knowledge or presumed knowledge of the promisor's error is vital in determining the enforceability of the contract. The court noted that to succeed in their claim, the claimant would have to prove that the defendant knew or ought to have known of the claimant’s mistake. This integration shows that the legal system tries to balance the need for objectivity in contracts with the need to prevent unfair results where there is a clear discrepancy in understanding due to one party's actual knowledge of an error, or a failure to act as a reasonable person would in their position.
Objective Agreement and its Limits
The objective approach, as seen in Smith v Hughes, ensures that contracts are enforced based on what was communicated between parties. This approach prevents parties from later claiming that they did not intend to be bound by terms that were outwardly agreed upon. However, the exception for unilateral mistake prevents the enforcement of an agreement when one party knows or should know of a fundamental mistake the other party made. The two cases examined above showcase this dynamic of objective determination balanced by an exception for clear, evidenced, mistakes. Therefore, the objective theory does not operate in a vacuum. In essence, a reasonable person will take all factors into account, including those which show that the other party is operating under a misapprehension. For example, if it is clear on the facts that a person is likely to have made a mistake, a reasonable person should appreciate this and take it into consideration. The law attempts to impose liability on a party where they knew, or ought to have known, of a mistake, but still attempted to hold the mistaken party to the agreement. This balance underscores the court’s consideration of fairness when enforcing contracts.
Conclusion
The principles illustrated by Smith v Hughes and Centrovinicial Estates demonstrate the critical balance between objectivity and limited subjectivity in contract law. The general rule of objective agreement requires contracts to be assessed based on how a reasonable person would understand the communications of the parties. This principle promotes commercial certainty and upholds the express terms agreed by parties. However, the doctrine of unilateral mistake, as applied in Centrovinicial Estates, provides a necessary exception to this rule. If one party is aware, or reasonably ought to be aware, of the other's mistake regarding a crucial term, the contract may be deemed void. This ensures fairness and prevents unjust enrichment. These legal frameworks ensure the stability and reliability of contractual agreements whilst still preventing obvious errors being exploited to create an unfair advantage. The application of these standards provides predictability and commercial reliability.
