I didn’t mean to sign that –when can a party escape from a contract because they didn’t understand it?

You are negotiating a deal and it becomes clear the other party has misread or misunderstood the effect of a clause in the document.  Do you point this out to the other party or stay silent and hope they don’t notice?

The risk of staying silent is highlighted by the recent decision of the Victorian Supreme Court in Toma v Olcorn[i].   Ms Olcorn owned a 20 hectare rural property with a farmhouse, seven dams, a manège, stables and other outbuildings.  The property was subject to a 99 year lease of a small area to Vodafone for a telecommunications tower.  The total rent of $350,000 plus GST was paid in 2 instalments on commencement and one month later.

Five years after the lease was granted Ms Olcorn decided to sell the property.  She appointed an agent with instructions to sell for between $870,000 and $950,000.  An initial offer from Mr Toma of $870,000 made in an email was rejected.  Following an open for inspection Mr Toma increased his offer to $900,000.  Ms Olcorn instructed the selling agent that she was happy to accept that offer and arranged for a contract to be prepared.  The contract was signed on 26 June 2017.

The contract included a special condition under which the purchaser acknowledged that “all payments due pursuant to the terms of the Lease have been paid to the vendor/lessor and no further payments are required to be made by the Lessee under the terms of the Lease“.  However Ms Olcorn’s solicitor had overlooked one of the conditions contained in the standard contract which provided for all rent and income received by the vendor to be apportioned between the parties on the settlement date.  The practical effect of the adjustment was to reduce the purchase price by almost $330,000.

Mr Toma claimed to have been surprised when a dispute arose and denied having knowledge that the seller was proceeding under the mistaken belief she would be entitled to retain all of the rent already paid by Vodafone.  The trial judge and the Court of Appeal found this implausible.  On the evidence, the trial judge concluded that Mr Toma did know of Ms Olcorn’s mistake and that he opportunistically sought to take advantage of it.  In particular:

• At the time Mr Toma made his $870,000 offer he knew there was a telecommunications lease but admitted he did not know the term of the lease or the rent payable
• Mr Toma sought information as to the tower lease repeatedly and was seeking confirmation that all of the rent had been prepaid
• Mr Toma’s solicitor wrote to Ms Olcorn’s solicitor as soon as she received the contract and sought confirmation that rent would be an adjustable item at settlement.  This was described by the judge as a ‘gotcha’ letter and indicated Mr Toma apprehended a dispute.

Ms Olcorn was therefore entitled to rescind the contract.

A mistake by one party about the terms of a contract is not, of itself, sufficient to entitle the party to get out of the contract.  However where the mistake is sufficiently serious and the other party is aware of the mistake and engages in some form of sharp practice, the courts may allow rescission or in some circumstances may rectify the contract.

Sharp practice can include deliberate steps to prevent the first party from becoming aware of the mistake or some form of unconscionable conduct.  As this decision illustrates, even doing nothing when you are aware of a significant and costly error by the other party, can be regarded as unconscionable in some circumstances.

[i] [2019] VSC 216