B. Misunderstandings
| Author | John D. McCamus |
| Profession | Professor of Law. Osgoode Hall Law School, York University |
| Pages | 496-526 |
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A misunderstanding occurs where one party is not clear about the correct meaning of a term or terms of the agreement or where both parties understand the meaning of a term or terms differently, neither under-
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standing being, in the requisite sense, the correct meaning of the agreement. In a case of misunderstanding, the critical question is whether the parties have reached a true consensus ad idem. The mere fact that one party suffers from a misunderstanding of one or more of the terms of an agreement does not necessarily lead to the conclusion that no consensus has been achieved. Where the other party correctly understands the meaning of the agreement, a consensus may be achieved on the basis of the objective theory of contract formation. Notwithstanding the misunderstanding, the other party to the agreement may be entitled to rely on the mistaken party’s objective manifestation of assent as a basis for the creation of a valid and binding consensus. As Blackburn J. observed in Smith v. Hughes:6"If whatever a man’s real intention may be, he so conducts himself that a reasonable man would believe that he was assenting to the terms proposed by the other party and that the other party upon that belief enters into the contract with him, the man thus conducting himself would be equally bound as if he had intended to agree to the other party’s terms."7Thus, even where a consensus may be said to fail at a subjective level, the consensus may be achieved on an objective basis and the contract so created is an enforceable one. A consensus may fail, however, where each party has a different understanding of a term that is so ambiguous or vague or imprecise that neither party can insist on his or her own meaning as being the true or correct meaning of the term of which the other party has objectively assented. In such a circumstance, the common law of contract formation holds that no enforceable contract has been created. Similarly, a consensus will fail where one party is aware of the other party’s mistaken understanding of a particular term. Again, the lack of consensus leads to the conclusion that no contract has been created at common law. We consider both of these types of cases below.
Under traditional common law doctrine, there are two further instances in which particular types of mistakes may lead to the conclusion that a consensus ad idem has not been achieved. First, where a party enters into an agreement with one person, believing that person to be someone else - a so-called mistake of identity - it was held at common law that no enforceable agreement had been created, at least in circumstances where the other party was actively involved in inducing the mistake. A second type of error induced by the other party that may give rise to a finding of no consensus is a mistake as to the very nature of the agreement entered - typically by executing a written
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agreement - by the mistaken party. These are cases of so-called non est factum. If the doctrine is applicable, the mistaken party is allowed to assert that he or she did not assent to the signed agreement and it should therefore be considered to be a nullity at common law. Both of these doctrines are, however, controversial because of the potential impact they may have on third parties. In the context of an unenforceable contract for the purchase and sale of goods, for example, where the purchaser has induced the error rendering the contract unenforceable, a third party may have innocently repurchased the subject matter of the sale from the purchaser. Since, if either doctrine applies, the agreement is a nullity at common law, no property interest in the subject matter of the sale will have passed to the purchaser who induced the error, typically referred to as the "rogue," and the rogue, in turn, will not have passed an interest in the goods to the third-party purchaser. The innocent third party is thus exposed to a claim by the seller for the innocent purchaser’s unwitting conversion of the goods. In such cases, the common law, when faced by the dilemma of preferring the interests of one innocent party, the original seller, over those of another innocent party, the third-party purchaser, chose to favour the former. As we shall see, critics of these common law doctrines suggest that their role ought to be reduced, if not eliminated, with the result that the original seller’s claim in conversion in such a case would fail and the seller would be left to those remedies available against the rogue on the basis of the rogue’s fraudulent misrepresentation. The equitable remedy of rescission for misrepresentation would not prevent the initial formation of the contract and would, as a consequence, afford protection to the innocent third party until the point in time at which rescission occurs.
An agreement that contains a term that is either ambiguous or so vague and imprecise that each party can reasonably have a different understanding of the meaning of the term may be held to fail for lack of consensus ad idem. The leading illustration of the phenomenon is the fact situation in Raffles v. Wichelhaus.8The plaintiff had agreed to sell certain bales of cotton to the defendant to arrive "ex Peerless" from
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Bombay. As it happened, there were two vessels named Peerless due to sail from Bombay, one in October and the other in December. Although, in the actual case, the matter was discussed only in the context of an interim proceeding, the court appears to have assumed that if the parties had different ships Peerless in mind, the contract would be un-enforceable, Subsequent generations have assumed that the case stands as authority for the proposition that the contract would be unenforceable in such circumstances for failure of consensus ad idem.
The conventional understanding of Raffles v. Wichelhaus is that it would not have been possible in that case for one party to establish that his understanding of which ship Peerless was intended by the agreement was the more reasonable one. If, on the other hand, the buyer, for example, was able to establish that his meaning was the reasonable one in the circumstances, the contract would be formed on that basis. The party whose understanding of the term can be established to be the reasonable or conventional understanding is able to rely upon the objective theory of contract formation. Thus, in Lindsey v. Heron & Co.9
Middleton J. embraced the following proposition:
The apparent mutual assent of the parties essential to the formation of a contract must be gathered from the language employed by them, and the law imputes to a person an intention corresponding to the reasonable meaning of his words and acts. It judges of his intention by his outward expressions and excludes all questions in regard to his unexpressed intention. If his words or acts, judged by a reasonable standard manifesting attention to agree in regard to the matter in question, that agreement is established, and it is immaterial what may be the real or unexpressed state of his mind on the subject.10On this basis, then, a private and unreasonable interpretation of a term of the agreement would not prevent its formation. In Hobbs v. Esqui-malt & Nanaimo Railway Company,11for example, the defendant railway company was unable to defeat an agreement under which it purported to sell land to the plaintiff on the basis of its private understanding of the meaning of the term "land." According to the defendant’s evidence, it had adopted the practice of selling only the surface rights to land and not the mineral rights relating to a particular parcel. Accordingly, when it entered into an agreement to sell land to Mr. Hobbs, it intended to convey only the surface rights. Mr. Hobbs claimed that he had relied,
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in entering the agreement, on the ordinary meaning of the term "land," as normally including both surface rights and mineral rights. The Supreme Court held that the railway company’s private understanding of the meaning of the term was unreasonable. Accordingly, Hobbs was entitled to enforce the agreement on the basis that it required transfer of the full ownership rights to the land.
In Lindsey v. Heron & Co.12itself, the parties to a contract for the purchase and sale of shares had in mind different companies with similar-sounding names. The seller had approached the defendant and asked, "What will you give me for seventy-five shares of Eastern Cafeterias of Canada?" The defendant replied that he would look into the question and later responded, "I will give you ten dollars and fifty cents a share for your Eastern Cafeterias." The plaintiff replied, "I accept your offer." In fact, the defendant had in mind purchasing shares in Eastern Cafeterias Ltd., an apparently more valuable stock. Applying the objective approach to this exchange of communications, however, the majority of the Court of Appeal took the view that the defendant led the plaintiff seller to understand that he was prepared to pay ten dollars and fifty cents per share, for shares in Eastern Cafeterias of Canada. Had the plaintiff offered to sell shares in "Eastern Cafeterias," however, the term would have been ambiguous and there would have been no contract. In dissent, Lennox J. would have held that the offer to buy "your Eastern Cafeterias," which was accepted by the plaintiff, suffered from an ambiguity in the sense that the parties each had different ideas of the shares being referred to. Accordingly, he would have held that, as the parties were not referring to the same subject matter, there was no consensus ad idem.
Application of the objective theory...
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