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IAI Actuarial Core Principles · Business Management · Sources of Indian law and valid contracts

Two parties, Ritu and Samir, both wrongly believe that a particular consignment of fabric, which is the subject of their sale agreement, exists. It had in fact been destroyed in a fire the previous night, unknown to both. What is the legal effect of the agreement?

The agreement is void because both parties made a mutual mistake of fact about something essential, namely the existence of the fabric. With no valid contract, neither can enforce it, and damages for non-delivery are unavailable.

  1. AVoidable at Ritu's option as the buyer
  2. BValid, with Samir liable for damages for non-delivery
  3. CVoid, because both parties were under a mistake of fact essential to the agreementCorrect
  4. DValid, because each party took the risk of the mistake
  5. Void only if the price was already paid in full

Explanation

Where both parties to an agreement are under a mistake as to a matter of fact essential to the agreement, the agreement is void. Existence of the subject matter is essential, so the sale cannot be enforced. It is not merely voidable, and damages for non-delivery do not arise because there is no contract.

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