The ruling confirms that a contract is not invalid just because
one of the parties is mistaken about its basis. A contract can be
invalidated if one of its actual terms is a mistake, but not if the
mistake simply forms a part of one party's understanding, the court
said.
The High Court heard a shipping dispute in which Norwegian oil
and gas company Statoil and US commodity trader Louis Dreyfus
argued about the fees to be paid for using a container ship for
longer than stated in a contract. Those fees are calculated on a
per day basis and are called demurrage.
Statoil chartered a ship to transport liquid propane gas to
Mexico under order by Louis Dreyfus (LD), which had a buyer for the
gas there. The ship was delayed in offloading its cargo, which it
eventually did in three batches, the last on 24th October 2006.
It was Statoil's job to deal with the ship owner in relation to
payment for that delay. Statoil's Ole Rostrup made a mistake when
calculating the demurrage and sent a bill to LD for demurrage only
up to 13th October. The two companies agreed a much smaller amount
than that which was really due.
LD sought to uphold that contract, while Statoil claimed that it
could not stand because it was based on a mistake.
LD's Ray Hodge admitted in court that he knew that Rostrup had
got the dates wrong. He said it was discussed at his company and it
was decided not to correct Rostrup over the bill for $103,527.84,
which Statoil later calculated should have been for
$549,360.96.
In fact LD charged its gas buyer almost the entire actual
demurrage charge. It asked its buyer for $539,361.11 to cover
demurrage even as it insisted to Statoil that it would only pay
$103,527.84.
A contract can be invalid if the terms of the contract are
themselves a mistake. This is called a unilateral mistake and it
invalidates a contract because the two parties are said to have
never actually agreed on something crucial, so a contract cannot
have been concluded.
"The general rule at common law is that if one party has made a
mistake as to the terms of the contract and that mistake is known
to the other party, then the contract is not binding," said Mr
Justice Aikens in his ruling. "The reasoning is that although the
parties appear, objectively, to have agreed terms, it is clear that
they are not in agreement."
"Therefore the normal rule of looking only at the objective
agreement of the parties is displaced and the court admits evidence
to show what each side subjectively intended to agree by way of
terms. If it is clear from such evidence that there was not
consensus, then there can be no contract, because the parties have
not truly agreed on the terms. Some of the cases talk of such a
contract being 'void', but I think it is clearer to say that there
was never a contract at all," he said.
Statoil argued that this was the situation in its case against
LD, but Mr Justice Aikens disagreed.
"If one party has made a mistake about a fact on which he bases
his decision to enter into the contract, but that fact does not
form a term of the contract itself, then, even if the other party
knows that the first is mistaken as to this fact, the contract will
be binding," he said.
The Court looked at whether it was a term of the contract itself
that the ship had completed offloading its cargo on 13th October,
which was a mistaken assumption. He found that that assumption was
not actually a term of the contract, and so the law of unilateral
mistake did not apply.
"It is true that Mr Rostrup sent to [LD's] Mr Hodge a hard copy
of the calculation sheet, which showed that he had put in the
information that 'laytime ended' on 13 October 2006. It is also
true that Mr Hodge saw this sheet and annotated it with his revised
figures before the agreement was reached. But the date for the
completion of discharge was not a term of the contract of
compromise as to the amount of demurrage due on this sale
contract," said the ruling.
Rostrup and Hodge had a later phone conversation whose contents
were disputed. Rostrup claimed that Hodge agreed to pay the full
demurrage bill, and send Hodge an email and a new invoice
immediately, which were not replied to. Hodge later denied that he
had made that agreement.
Mr Justice Aikens believed Rostrup over Hodge. He said that
while the earlier agreement between Statoil and LD stood because
the mistake did not undermine the contract, it was superceded by
the oral agreement and so LD must pay the full demurrage bill.
Disclaimer: We hope you find OUT-LAW’s content useful. It’s prepared by the lawyers at Pinsent Masons. Please remember, though, that it’s intended as general information only. It’s not legal advice. If that’s what you’re seeking, please
contact us. See also: our
full disclaimer
