8 September 2011 | Lorna Kelly

Does a mistake compromise a contract’s validity?

The Case

TTMI instructed ship-brokers to enter into a sub-contract agreement (known as a ‘charter-party’) with Statoil to carry cargo from Norway to Texas on one of TTMI’s vessels.

Charter-parties are commonly concluded by an exchange of emails, with the terms later reiterated in a ‘recap email’. In the recap sent to Statoil, the ship-brokers mistakenly named TTMI’s then parent company, Sempra Energy, as the contractor instead of TTMI. Despite this mistake, the voyage was performed by the ship-broker on behalf of TTMI and Statoil paid the invoice issued by TTMI.

TTMI later claimed against Statoil for liquidated damages under the terms of the charter-party as outlined in the recap email. Statoil argued no such contract existed because it believed it was entering into a contract with Sempra. It further argued because a mistake had been made, the courts could not imply a contract.

TTMI appealed against an arbitrator’s decision rejecting claims the parties were bound by the contract. The High Court disagreed with Statoil’s argument. While the mistake of the sub-contractors prevented an express agreement from arising, the High Court found that, from an objective viewpoint looking at the conduct of the parties as a whole, an implied contract between TTMI and Statoil had formed which bound the parties to the terms of the recap email.

What this means

This decision should be considered a warning that the actions of commercial parties can lead to the formation of a binding contract. The parties cannot rely on a mistake in the terms of the contract meaning no contract exists at all, even if it prevented an express agreement from arising.

This warning should be taken with a pinch of salt as the outcome of contract formation disputes will always turn on the facts of each case. It should also be noted the judgment in this case differs from other recent decisions on contract formation. The trend emerging in recent cases has suggested the courts are more predisposed to finding that no contract exists, but that the parties are entitled to recover reasonable payment for the work performed.

* Lorna Kelly is a senior associate at 
Dundas & Wilson