Mistake in a Contract

a. Answer questions (i) and (ii) based on the Contracts Act 1950.

(i) Under what circumstances will ‘mistake’ prevent the formation of a valid contract? (3 marks)

(ii) Serena sold her business to Konya stating that her business was in a healthy state. Serena did not disclose, nor did Konya request for the breakdown of figures which would have revealed a steady decline in the profit for the last three years. Konya discovered the true state of affairs after having purchased the business.

What remedies, if any, does Konya have? (5 marks)

b. N/A Sale of Goods Act 1957. (5 marks)

c. Explain how judicial decisions form part of the law of Malaysia. (4 marks)

(MIA QE 2009/3 Q1, 20 marks)

(i) Mistake in a contract, please refer to earlier posts 'vitiating factors of a contract' here, common mistake and mutual mistake in contract, circumstances affecting validity of contract.

From Contracts Act, 1950, the provision on mistake is actually much simpler.

Agreement void where both parties are under mistake as to matter of fact
21. Where both the parties to an agreement are under a mistake as to a matter of fact essential to the agreement, the agreement is void.

Explanation—An erroneous opinion as to the value of the thing which forms the subject-matter of the agreement is not to be deemed a mistake as to a matter of fact.

(a) A agrees to sell B a specific cargo of goods supposed to be on its way from England to Kelang. It turns out that, before the day of the bargain, the ship conveying the cargo had been cast away and the goods lost. Neither party was aware of the facts. The agreement is void.

(b) A agrees to buy from B a certain horse. It turns out that the horse was dead at the time of the bargain, though neither party was aware of the fact. The agreement is void.

(c) A, being entitled to an estate for the life of B, agrees to sell it to C. B was dead at the time of the agreement, but both parties were ignorant of the fact. The agreement is void.

Effect of mistake as to law
22. A contract is not voidable because it was caused by a mistake as to any law in force in Malaysia; but a mistake as to a law not in force in Malaysia has the same effect as a mistake of fact.

and B make a contract grounded on the erroneous belief that a particular debt is barred by limitation: the contract is not voidable.

Contract caused by mistake of one party as to matter of fact 
23. A contract is not voidable merely because it was caused by one of the parties to it being under a mistake as to a matter of fact.

(ii) This can be a case of Fraud or Misrepresentation.

Konya was misrepresented by Serena as to arrive at her decision to buy the business from her.

Misrepresentation in Contract Law is posted earlier, what constitute a voidable contract? Vitiating factors of a contract which has a topic on misrepresentation.

From Contracts Act, 1950, the provisions are:

“Misrepresentation” includes—

  1. (a)  the positive assertion, in a manner not warranted by the information of the person making it, of that which is not true, though he believes it to be true;

  2. (b)  any breach of duty which, without an intent to deceive, gives an advantage to the person committing it, or anyone claiming under him, by misleading another to his prejudice, or to the prejudice of anyone claiming under him; and

  3. (c)  causing, however innocently, a party to an agreement to make a mistake as to the substance of the thing which is the subject of the agreement. 

On the other hand, there is an element of fraud as Serena should have known the business had not do well, yet did not disclose to Konya. This concealing of facts, with intention to cheat, is fraud (S.17 (b) below:-

17. “Fraud” includes any of the following acts committed by a party to a contract, or with his connivance, or by his agent, with intent to deceive another party thereto or his agent, or to induce him to enter into the contract:

  1. (a)  the suggestion, as to a fact, of that which is not true by one who does not believe it to be true;
  2. (b)  the active concealment of a fact by one having knowledge or belief of the fact;
  3. (c)  a promise made without any intention of performing it;
  4. (d)  any other act fitted to deceive; and
  5. (e)  anysuchactoromissionasthelawspeciallydeclarestobe fraudulent.

Explanation—Mere silence as to facts likely to affect the willingness of a person to enter into a contract is not fraud, unless the circumstances of the case are such that, regard being had to them, it is the duty of the person keeping silence to speak, or unless his silence is, in itself, equivalent to speech. 


Voidability of agreements without free consent
(1) When consent to an agreement is caused by coercion, fraud, or misrepresentation, the agreement is a contract voidable at the option of the party whose consent was so caused.

(2) A party to a contract, whose consent was caused by fraud or misrepresentation, may, if he thinks fit, insist that the contract shall be performed, and that he shall be put in the position in which he would have been if the representations made had been true.

[What can be done by Konya? She can choose to void the contract as in S.19(1), or ask for the compensation of the loss which would put her back to the position if the representation had been true as in S.19(2).]

Exception—If such consent was caused by misrepresentation or by silence, fraudulent within the meaning of section 17, the contract, nevertheless, is not voidable, if the party whose consent was so caused had the means of discovering the truth with ordinary diligence.

Explanation—A fraud or misrepresentation which did not cause the consent to a contract of the party on whom the fraud was practised, or to whom the misrepresentation was made, does not render a contract voidable.

(a) Aintending tdeceive B, falsely represents that five hundred gantangs of indigo are made annually at A’s factory, and thereby induces B to buy the factory. The contract is voidable at the option of B.

(b) A, by a misrepresentation, leads B erroneously to believe that five hundred gantangs of indigo are made annually at A’s factory. B examines the accounts of the factory, which show that only four hundred gantangs of indigo have been made. After this B buys the factory. The contract is not voidable on account of A’s misrepresentation.

(c) B, having discovered a vein of ore on the estate of A, adopts means to conceal, and does conceal, the existence of the ore from A. Through A’s ignorance B is enabled to buy the estate at an undervalue. The contract is voidable at the option of A.

(d) A is entitled tsucceed tan estate at the death of Bdies; Chaving received intelligence of B’s death, prevents the intelligence reaching A, and thus induces A to sell him his interest in the estate. The sale is voidable at the option of A

(b) Not included in Syllabus.

(c) Judicial decisions, is like judicial precedent. Please refer earlier posts below.

Judicial precedent are asked in:
MIA QE 2008/3 Q1 (c) State briefly the advantages of the doctrine of binding judicial precedent.
MIA QE 2009/3 Q1 (c) Explain how judicial decisions form part of the law of Malaysia.
MIA QE 2014/3 Q1 (a) Explain the meaning of “binding judicial precedent” in the context of unwritten law in Malaysia.
MIA QE 2012/9 Q1 (a) ‘Judicial Precedent’ is one of the sources of “unwritten laws” in Malaysia.
MIA QE 2014/9 Q1 (a) What is meant by ‘judicial precedent’?
Precedence - is it always followed? Advantages and Disadvantages.
2012 D02 Q2 briefly explain Judicial precedent.
Briefly explain the challenges of Stare Decisis in Malaysian Courts.
What is meant by "Stare Decisis"?

MIA model answer included two other judicial decisions:

Declaratory precedent
A declaratory precedent is one which is merely the application of an already existing rule of law.

Original precedent
Original precedent means a precedent that creates and applies a new legal rule. An original precedent is made when there is no previous judicial decision on a point of law. When the court has to form an original precedent, a judge will come to their decision by analogy. That is, by considering the cases that are nearest to it in principle. The decisions in the referred cases are not binding on the court but they may be persuasive.

S.17-19 Contracts Act, 1950
Definitions from

Difference between Original Precedents and Declaratory Precedents