In considering whether to apply the doctrine of common mistake either at common law or in equity, the court should look to the contract itself to see if the parties had provided for who bears the risk of the mistake. If they have, that provision must govern.

No unjust enrichment in case of common mistake

Subcontractor inadvertently failed to bill contractor for part of amount owing under contract • Error not noticed until after release signed acknowledging payment in full • Subcontractor argued common mistake to set aside agreement • Release clearly required subcontractor to bear consequences of mistake • Contractor not unjustly enriched

Miller Paving Ltd. v. B. Gottardo Construction Ltd.

In 1999, Gottardo contracted with SLF Joint Venture, the owner of Highway 407, to obtain and spread the aggregate materials required for an extension of the highway. Gottardo then contracted with Miller for the supply of aggregate. The highway extension project was completed in September 2001 and, at SLF’s request, Gottardo signed a full and final release of all claims it might have against SLF.

On December 20, 2001, Gottardo paid Miller its outstanding balance, and at the same time the parties signed a Memorandum of Release. Miller acknowledged that “payment in full has been received for the materials supplied.”

However, a month later, Miller discovered that it had inadvertently failed to bill Gottardo for many truckloads of aggregate. As a result, it delivered an invoice to Gottardo for $480,604, later reduced to $448,670. Up to the point of the disputed invoice, Gottardo had paid Miller more than $4,700,000.

Gottardo acknowledged that it had received payment from SLF for most of the supplied material but it nevertheless refused Miller’s claim on the strength of the Memorandum of Release. Miller took the matter to court. It advanced its claim first on the basis of its supply contract and, in the alternative, on the doctrine of unjust enrichment.

The trial judge found as a fact that there was no reason for Gottardo to know of any outstanding amounts owed to Miller when the December 20 Release was signed, nor that it ought it to have known. He also found that Miller’s failure to send the disputed invoice until early 2002 was due to a “gross oversight”. Miller did not dispute this finding, and agreed that Gottardo had no responsibility for the mistake.

Finally, the judge found that Gottardo spent the “windfall” funds received from SLF to buy new equipment which it would not have bought without these funds. The judge decided that, by making the purchase, Gottardo had “altered its position”, that is, changed its financial situation in a way that was not reversible.

Miller appealed, arguing that the judge erred in failing to properly apply the doctrine of common mistake to the December 20 agreement.

“There can be no doubt that this is a case of common mistake,” wrote Justice Goudge for an unanimous Court of Appeal. Miller and Gottardo shared a mistake regarding payments for the material supplied by Miller. The question was whether the agreement should be set aside because of that common mistake.

The court reviewed the two most important precedent cases on that topic: the 1932 decision of the House of Lords in Bell v. Lever Brothers Ltd. and the 1949 decision of the English Court of Appeal in Solle v. Butcher.

In Bell, Lord Atkin found that for the doctrine of mistake to operate, it must be shown that the subject matter of the contract has become something essentially different from what it was believed to be.

In Solle, Lord Denning developed the equitable approach to common mistake that allowed the court to give relief for common mistake when it would be unconscionable to allow a contracting party to avail itself of the legal advantage it had obtained, and where this could be done without injustice to third parties:

A contract is also liable in equity to be set aside if the parties were under a common misapprehension either as to facts or as to their relative and respective rights, provided that the misapprehension was fundamental and that the party seeking to set it aside was not himself at fault.

Justice Goudge felt that both these doctrines have been “woven into the fabric of Canadian contract law.” Another English decision, Great Peace Shipping Ltd. v. Tsavliris Salvage (International) Ltd., added a caution: in considering whether to apply the doctrine of common mistake either at common law or in equity, the court should look to the contract itself to see if the parties had provided for who bears the risk of the mistake. If they have, that provision must govern.

The Memorandum of Release between Gottardo and Miller clearly provided that it was the supplier who acknowledged that payment in full had been received. Moreover, the billing arrangements in the supply contract between the parties made it the responsibility of the supplier to determine what was owing for the material supplied, and to invoice for that amount. Thus, the contract clearly allocated to Miller the risk that payment in full had not been received. The Court of Appeal therefore found that the December 20 Release required Miller to bear the consequences of the mistake, rather than allowing it to invoke the doctrine of common mistake to avoid them.

Finally, even if Miller could resort to the doctrine of common mistake, it still could not succeed in setting aside the December 20 agreement.

First, to apply the common law approach found in Bell, Miller would have to show that, as a result of the common mistake, the subject matter of the contract had become something essentially different from what it was believed to be. Nothing about the mistaken assumption changed the subject matter of the agreement, namely, payment for the supplies.

Second, to engage the equitable doctrine of common mistake as described in Solle, Miller would have to show that it was not at fault. That it could not do. The mistake was due to errors in Miller’s own procedures and was not in any way the responsibility of Gottardo. The enrichment of Gottardo that resulted from the mistake was offset by the finding that, as a result of the overpayment, Gottardo had altered its position. It was not unjust for Gottardo to avail itself of the advantage it had gained.

The appeal was dismissed, with costs awarded to Gottardo.

Court of Appeal for Ontario
   Goudge, Gillese and Land, JJ.A
   June 7, 2007