1 MISTAKEN CONTRACTS Law of Contract LW1154 BCL 2005-2006

MISTAKEN

CONTRACTSLaw of Contract

LW1154BCL 2005-2006

Mistake – Reading

TextbookClark, Contract Law chapter 10

ReferenceMcDermott, Contract Law

chapter 12

Is “mistake” a single topic? Clark argues that it is He defines “operative mistake” and

then spells out its effects But McDermott and others

think this is too confusing They split “mistake” into

several different chunks Different doctrines,

different effects

The approach in these lectures

1. Parties at cross-purposes i.e. The parties weren’t really in

agreement at all

2. Common mistake i.e. The parties really agreed, but on a

false basis

3. Special rules about mistakenly signed documents

Jargon often used here

‘Unilateral mistake’

= One side is mistaken and the other is not

i.e. The parties are at cross-purposes …

… and are not truly agreed

‘Common mistake’

= Both parties are making the same mistake

i.e. The parties are really in agreement …

… but on a false basis

‘Mutual mistake’

= Both sides are mistaken, but the mistakes are different

i.e. The parties are at cross-purposes …

… and are not truly agreed

Parties at cross-

purposes

Parties at cross-purposes

Basic idea: The parties never settled on the same set of terms

The terms one side offered were not the terms the other side accepted …

… so offer and acceptance never corresponded

Example 1 Falck v. Williams [1900] AC 176

Negotiations over hire of ships

Negotiations were by coded telegram

A telegram was sent, making an offer in respect of one ship

The recipient reasonably took it to refer to another ship

The recipient accepted the offer

Example 1Falck v. Williams [1900] AC 176

The Privy Council held:

The “offer” was ambiguous

The parties thought they were agreed, but actually meant different ships

So offer and acceptance did not correspond

No contract

Negotiations (by letter) for sale of rabbit skins

Price was discussed in pennies “per piece” (i.e. per rabbit skin)

Sellers then sent a new price offer “per pound”(i.e. by weight)

Buyers immediately agreed to this

Example 2Hartog v. Collin [1939] 3 AER 566

Singleton J held: The offer “per pound” was absurdly

low It was obviously a typing error … … and wasn’t what the seller really

meant So there was no offer capable of

acceptance, and no contract

Ambiguity – relevance of fault

Sometimes there is ambiguity over exactly what is agreed to

In marginal cases, the court is influenced by who is more at fault

e.g. Falck v. Williams e.g. Hartog v. Collin

Example – relevance of faultMegaw v. Molloy (1878) 2 LR (Ir) 530

P had two ship-loads of maize to sell The cargo from the “Jessie Parker”

was of high quality The cargo from the “Emma Peasant”

wasn’t P’s broker displayed samples of

“Jessie Parker” maize labelled as being from “Emma Peasant”

D inspected the sample, and agreed to buy the “Emma Peasant” cargo

Example - relevance of faultMegaw v. Molloy (1878) 2 LR (I) 530

The Court of Appeal held: D really meant to buy the cargo

corresponding to the sample he inspected …

… i.e. the “Jessie Parker” cargo So P and D weren’t truly in agreement The source of the mistake was plainly

the broker, P’s employee

Mistake as to identity

Basic principle

Offer and acceptance must correspond

So if I make an offer to X … … it cannot be accepted by Y A purported acceptance by Y won’t

make a contract

Qualification to basic principle Most contractors don’t care who they

are dealing with So long as the contract is performed,

the identity of the other person usually doesn’t matter

If the identity of the other person is commercially irrelevant …

… a contract is formed despite the mistake

Basic principle + qualification

A mistake as to the identity of the other person makes the contract void …

… unless their identity was commercially irrelevant

Various different situations arise

Mistake as to identity 1:Parties dealing face-to-face

I negotiate with you

I tell you that I am someone famous

When you discover the truth, can you say there is no contract?

Your offer was only addressed to the

famous person

But in many cases, identity has no

commercial relevance

So we need to ask what sort of contract

it is – Was identity relevant?

Mistake as to identity 1:Parties dealing face-to-faceIdentity usually

matters for e.g.:

Contract for skilled services

Contract for memoirs

Employment

Identity usually irrelevant for e.g.:

Purchase of consumer goods

Purchase of land or shares

If the mistaken party would have dealt with anyone on the same terms, mistake is irrelevant and the contract is valid

But if identity is commercially important, mistake makes the contract void

The tricky case: If identity is important but only to

confirm creditworthiness i.e. One side went to a lot of trouble to

confirm the other's identity … … but only as a way of checking that

they were creditworthy

Identity to establish credit A mistake as to creditworthiness does

not render a contract void But the innocent party may argue that

there was really a mistake as to identity ...

... even if identity only mattered for reasons of creditworthiness

The case law conflicts

Example Phillips v. Brooks [1919] 2 KB 243

A conman selects jewellery at a shop “You see who I am, I am

Sir George Bullough” He pays by cheque Shopkeeper allows

him to take a ring against a cheque

The cheque bounces

Example Phillips v. Brooks [1919] 2 KB 243

Horridge J holds: There was a valid contract of sale “I think the seller intended to

contract with the person present”

… even though the shopkeeper had tried to confirm the buyer’s identity

A contrasting exampleIngram v. Little [1961] 1 QB 31

A conman tried to buy a car 2nd-hand His offer for the car was accepted But when he produced a chequebook,

he was told the deal was off He gave more details of his (false)

identity The sellers

took his cheque

The Court of Appeal held: There was a crucial mistake as to

identity The sellers were very particular about

who they took cheques from The conman had convinced the sellers

that he was “... an individual of apparent standing and respectability” (Pearce LJ)

A contrasting exampleIngram v. Little [1961] 1 QB 31

Is there a genuine difference between the two cases?

Is Phillips really “a borderline case”? Both courts looked at the facts in

detail … … but it is not clear what they were

looking for Away from the detail, the cases seem

very similar indeed

Reconciling the two approaches?Lewis v. Avery [1972] 1 QB 198

The buyer of a car claimed to be a famous TV actor

He produced a pass to Pinewood Studios

He persuaded seller to accept his cheque

The cheque bounced

Reconciling the two approaches?Lewis v. Avery [1972] 1 QB 198

The Court of Appeal held: There was a strong presumption in

favour of a valid contract Detailed factual enquiries were

inappropriate The Ingram approach could only be

right in exceptional circumstances On the facts, there was nothing to

displace the presumption of a contract

Reconciling the two approaches?

Lewis has stood for 30 years now

But it has been criticised (e.g. in Shogun Finance v. Hudson [2002] QB 834, Sedley LJ)

Ingram has never been overruled

The matter is not settled

Basic principle + qualification

A mistake to the identity of the other person makes the contract void …

… unless their identity was commercially irrelevant

Mistake as to identity 2:Parties negotiating at a distance

Blenkarn orders goods from Lindsay He makes the letter look as if it comes

from Blenkiron & Co, a well-known firm

Lindsay assumes the letter is from Blenkiron

Lindsay send the goods, not noticing that the address is wrong

ExampleCundy v. Lindsay (1878) 3 AC 459

The House of Lords say: The contract was based entirely on

letters It was clear that the sellers meant only to

deal with Blenkiron & Co “Of [Blenkarn] they knew nothing, and

of him they never thought. With him they never intended to deal” (Lord Cairns)

So there was no contract

ExampleCundy v. Lindsay (1878) 3 AC 459

Cundy suggests a general principle, that mistake as to the person makes a contract void

But identity was unusually important in the case:The innocent party thought they were

dealing with a well-known and trustworthy firm

The rogue had gone to a lot of trouble to pose as this firm

A general principle?

So it might be different if identity seemed less important to the parties

If there is an apparent mistake as to identity …

… we must ask how important a mistake it was

A general principle?

Example 1Smallman v. O’Moore [1959] IR 220

O’Moore and Newman were partners They then formed a company to take

over their business They publicised this change of status in

the commercial press Smallman supplied goods to the

business, in ignorance of the change Was Smallman’s contract with the new

company, or with O’Moore and Newman personally?

Example 1Smallman v. O’Moore [1959] IR 220

Davitt P held: There was no true agreement Smallman intended to contract with

O’Moore and Newman … … whereas O’Moore and Newman

didn’t intend to contract with Smallman

“… the parties were not ad idem”

Jones sent a written order for goods to Brocklehurst, at his local shop

But Brocklehurst had just sold the shop to Boulton, who sent the goods to Jones

Brocklehurst owed Jones money, which he could have set against the price

Jones says there is no contract with Boulton

Example 2Boulton v. Jones (1857) 157 ER 232

Boulton argues: I received an

offer I accepted it by

supplying the goods

Therefore there is a contract

Jones argues: My offer was

sent to Brocklehurst, not Boulton

It cannot be accepted by anyone else

“… when anyone makes a contract in which the personality, so to speak, of the particular party contracted with is important, ... no one else is at liberty to step in and maintain that he is the

party contracted with ...” (Bramwell B)

So because the personality or identity of the shopkeeper was important, there was no contract here

Example 3Shogun v. Hudson [2003] UKHL 62

Hire-purchase contract for a car

The hire-purchaser claimed to be Durlabh Patel

He produced a driving licence in that name

The licence was stolen

Was there a contract?

Example 3Shogun v. Hudson [2003] UKHL 62

The House of Lords says that there was never a contract

The contract documentation was explicit that the contract, if any, was with Durlabh Patel

No-one else could step in and claim that the contract was really with them

Summary and re-cap: Parties at cross-purposes Failure to agree on fundamentally

important matters can make an apparent agreement voide.g. Mistake as to identity

(Cundy v. Lindsay)e.g. Mistake as to price

(Hartog v. Collin)e.g. Mistake as to what is being sold

(Falck v. Williams)

Sale of a sexually ambiguous bullock/ heifer

The seller knew it was hermaphroditic The buyer thought

it was a cow The court held, no

true agreement as to subject-matter

No contract

Parties at cross-purposesGill v. McDowell [1903] IR 463

But only fundamental mistakes count Not every mistake is that important The doctrine only applies to really

fundamental matters Lesser mistakes are dealt with by other

means: e.g. Interpretation of the contracte.g. Implied terms

Smith offered to sell oats to Hughes He showed a sample Hughes agreed to buy But Smith delivered new oats, which

were useless to Hughes Hughes thought that he was being

offered old oats But it was unclear whether Smith

actually said they were old oats

Example 1Smith v. Hughes (1871) LR 6 QB 597

Analysis: There was plainly a contract for the

sale of oats The age of the oats is not a

fundamental matter If Hughes wants to insist on old oats … … he has to prove that there is a

contractual term that the oats are old

The Court of Queen’s Bench said:

The issue is, What terms were agreed Perhaps it was a sale of oats Perhaps it was a sale of old oats Perhaps it was a sale by sample

Therefore a retrial was ordered …

… to determine which terms were in fact agreed

Example 2Clayton Love v. B&I (1970) 104 ILTR 157

D agreed to carry P’s cargo of scampi from Dublin to Liverpool

D agreed to carry it as a refrigerated cargo

D knew the loading would be at daytime temperature (60ºF)

P did not know that The cargo was ruined

Example 2Clayton Love v. B&I (1970) 104 ILTR 157 The Supreme Court held: There was a valid contract It was expressly agreed that the cargo

should be refrigerated Therefore the failure to refrigerate was

a breach of contract Damages were awarded

Example 3Reen v. Bank of Ireland [1983] IRLM 507

Multi-party litigation

D1 offers to settle for £3,000

P agrees, and is paid the money

P then realises that no provision has been made for the costs of other parties

But MacMahon J holds the agreement to settle is binding, whatever the position on costs

Common fundamental

mistake

Common fundamental mistake

i.e. mistakes which are: Common to both parties Of fundamental importance to their

agreement

So the parties are agreed, but on a radically false basis

What is “fundamental”?

“Fundamental” means:

something radically wrong with, or unexpected in, the very

subject-matter of the agreement

But the limits of this are now very controversial

“Fundamental” – example Galloway v. Galloway (1914) 30 TLR 531

A married couple separate They both sign a legal separation

agreement It then emerges that their marriage

was never valid

The court holds the contract void

Agreement (in London) to buy a ship-load of grain

The cargo had in fact already been damaged and disposed of (in Tunis)

The contract was held to be void

“Fundamental” – another example Couturier v. Hastie (1856) 5 HLC 673

What is “fundamental”?

Those two cases were examples of “non-existence of subject matter”

e.g. a contract over marital rights that did not exist (Galloway v. Galloway)

e.g. a sale of a cargo that did not exist (Couturier v. Hastie)

But the doctrine of “fundamental common mistake” is not confined to cases of non-existence

ExampleWestern Potato v. Durnan [1985] IRLM 5

Sale of seed potatoes to a farmer The seed should have produced at least

80 tons of potatoes The seed was defective – too old It produced only 9 tons

Clarke J held that there was a fundamental mistake, rendering the contract void

ExampleWestern Potato v. Durnan [1985] IRLM 5

Criticism of the case by Clark (1984) 19 Irish Jur 101:

This extends the doctrine of mistake too far

The parties dealt with seed quality in their written contract …

… and they should be held to what they said there

How “fundamental”?

So the “mistake” argument in Western Potato succeeded …

… but seems to be at the limit of the doctrine, for now at least

Now two examples where the argument from “mistake” failed …

… on the ground that the mistake was insufficiently fundamental

Example 1Fitzsimons v. O’Hanlon [1999] 2 IRLM 551

A man died, with assets of £120,000 P and D were different family

members, and commenced litigation They settled the litigation, P receiving

roughly half the money (£60,500) Then an additional account, holding

another £59,000, was discoveredCould P claim some of the £59,000, or

was he bound by the contract of settlement?

Example 1Fitzsimons v. O’Hanlon [1999] 2 IRLM 551

Budd J held: The settlement was for a specific

amount, it was not a 50:50 split It is important to hold people to

settlements, for reasons of legal finality The mistake was not sufficiently

fundamental So the contract could not be set aside

for mistake

Bell and Snelling were directors They secretly committed breaches of

duty, for which they could have been dismissed

Bell and Snelling then negotiated premature termination

The company later discovered the breaches of duty

Were the sums paid on termination recoverable ?

Example 2Bell v. Lever Brothers [1932] AC 161

The House of Lords refused to hold the contract void

A contract could be set aside for failure of a “common fundamental assumption” …

… but it was held (3:2) that the mistake was not fundamental enough

The company had paid to be rid of Bell and Snelling, and had got what they paid for

Example 2Bell v. Lever Brothers [1932] AC 161

In summary:

A sufficiently fundamental common mistake will render a contract void

A mistake as to the existence of the subject-matter of the contract is sufficiently fundamental …

… but it isn’t clear how much further the doctrine goes

An exception Even if there is a common

fundamental mistake: One party may be guaranteeing some

fundamental matter Whether this is so is a matter of

interpretation of the contract If so, then a fundamental mistake does

not make the contract void … … but rather is a breach of contract by

the party who made the guarantee

Example McRae v. CDC (1951) 84 CLR 377

D advertised for sale the wreck of an oil tanker

D gave a precise description and map reference

P agreed to buy the wreck

P equipped a vessel to salvage the wreck

But it did not exist!

Example McRae v. CDC (1951) 84 CLR 377

The High Court of Australia held: There was an implied undertaking that

the tanker really existed “The only proper construction of the

contract is that it included a promise by the Commission that there was a tanker in the position specified”

So P could recover damages from D

Is that it?

So there is a common law doctrine of “fundamental common mistakes”

But it is a narrow one

Some suggest there is also an equitable doctrine of mistake:

A considerably broader doctrine … … which allows the courts to act in a

discretionary manner

A broader, equitable doctrine?The position in England The English courts have sometimes

recognised a broader doctrine … … allowing intervention in cases of

fundamental common mistake The court need only act if it seems

just and reasonable to do so The court does not necessarily have

to set the contract aside … … but may impose fair terms

A broader, equitable doctrine?The position in England Examples of this doctrine: Sale of a house in ignorance of the

tenant’s rights(Solle v. Butcher [1950] 1 KB 671)

Settlement of insurance claim in ignorance of misrepresentations by one side(Magee v. Pennine Insc [1969] 2 QB 507)

A broader, equitable doctrine?The position in England

But this wider doctrine is controversial:

Some say it weakens commercial obligations too much

It contradicts Bell v. Lever Brothers, which is the leading case

The wider doctrine was disapproved by the Court of Appeal in The Great Peace [2003] QB 679

A broader, equitable doctrine?The position in Ireland

The Irish courts are currently between the two English extremes

There is clear authority that the Irish legal system recognises an equitable doctrine

But it seems to be a narrower one than that recognised in Solle v. Butcher

The leading Irish caseO’Neill v. Ryan [1992] 1 IR 166

Disputes between various shareholders in Ryanair

Two sets of legal proceedings were started

A contract was made to settle one of them

Alleged mistaken belief that the settlement covered all the proceedings

Costello J (upheld on appeal) held: Irish law recognises “equitable

common fundamental mistake” Here however it was unclear whether

the mistake was common (as opposed to unilateral)

The doctrine could not be invoked by a party at fault

Costello J refused to set aside the contract

The leading Irish caseO’Neill v. Ryan [1992] 1 IR 166

Special case:

signed documents

Sanctity of signed documents

Where both parties have signed a contractual document …

… the courts are reluctant to encourage pleas of “mistake”

Allowing such pleas defeats the object of reducing the agreement to writing

Written evidence is usually much better than oral evidence

3, very limited, exceptions

‘Non est factum’ Occasionally, one party can deny the

effect of their signature

Latent ambiguity An apparently clear agreement is

shown to be ambiguous and void

Rectification A contract is incorrectly recorded,

and the court corrects it

The doctrine of ‘non est factum’

This is a plea that you did not realise what you were signing

i.e. “your mind did not go with your pen”

The name of the plea is Latin: “... scriptum non est factum suum” = “... the writing is not [the

defendant’s] act”

The doctrine of ‘non est factum’

Requirements: A fundamental mistake … … as to the practical effect of the

document ... ... without carelessness on the signer's

If the plea succeeds, the signature has no effect

ExampleSaunders v. Anglia BS [1971] AC 1004

Gallie signed a deed She thought it conveyed land to her

nephew Parkin To conceal the transaction from his

wife, Parkin had altered the draft deed, to convey the property to his friend Lee

Lee absconded with the proceeds Was the deed void for mistake ?

1. Was there a fundamental mistake?

Clearly, yes Older case law said that the mistake

must be as to the “character” of the document, not its contents …

… but the House of Lords overruled the old cases

2. Was the mistake as to the practical effect of the document?

Gallie meant to make a gift to Parkin She was happy to do whatever Parkin

wanted Parkin wanted to give the land to Lee Therefore, there was no difference in

practical effect So the plea of non est factum failed

3. Was Gallie careless? Gallie could not read the document,

because her glasses were broken … … but the Lords said she should have

waited until they were repaired (!!) Gallie was not a conveyancer … … but the Lords said she should have

realised that the name was wrong A very harsh standard was applied!

Latent ambiguity

Two parties sign an apparently clear agreement

Then a key expression turns out to be ambiguous

In fact, the parties meant different things by it

The agreement will be void for mistake

Example 1Raffles v. Wichelhaus (1864) 2 B&C 906

Written agreement for the sale of the cargo of cotton on the “Peerless”

But there were two “Peerless”es … … and buyer and seller had different

ships in mind The contract was

held to be void for latent ambiguity

Example 2Mespil v. Capaldi [1986] IRLM 373

Two connected legal actions were started Written agreement to settle “all matters

in dispute between the parties in these proceedings”

In fact, the parties had different “proceedings” in mind

The settlement was void for mistake

Rectification

The parties have come to a definite agreement

They put their agreement in writing But the writing mis-records their

agreement Then the court will correct the writing

to reflect the real agreement This is called “rectifying” or

“reforming” the writing

Example 1Nolan v. Graves and Hamilton [1946] IR 376

P agreed to buy houses at £5,550

This was accidentally written down as “£4,550”

Haugh J held that P could not enforce the contract as written …

… and he rectified it to read “£5,550”

Example 2Collen v. Dublin City Council [1908] 1 IR 503 A builder agreed to certain building

work The price was to be calculated on an

agreed formula The clerk applying the formula made

an error … … so that a wrong figure was inserted

into the contract document Ross J rectified the contract document

The nature of the doctrine The doctrine is concerned with

rectifying documents of all sorts The doctrine is not confined to contract

law (it applies also to wills and property transfers generally)

It will not be applied where it would prejudice the rights of innocent 3rd parties (“bona fide purchasers for value”)

Only mistakes in the document

The doctrine only applies to mistakes in the document, not more widely

“Equity rectifies instruments, not contracts”

If the document contains what the parties meant it to contain …

… it is irrelevant that, in some other sense, one or more of them was mistaken

Example 1Racal Group v. Ashmore [1995] STC 1151

A deed was drawn up to secure certain tax exemptions

However, the parties had received bad legal advice …

… and the deed did not have the tax effect they wanted

But there was no clerical error … … and so no rectification

Example 2R McD v. V McD [1993] IRLM 717

A separated couple negotiated over maintenance, custody, etc

Their lawyers reduced the agreement to writing

The written document did not say who was to pay the wife’s legal costs

The wife later sought rectification

Example 2R McD v. V McD [1993] IRLM 717

Barron J held: There was never any agreement over

the wife’s legal costs Therefore there was nothing wrong

with the written instrument There was no ground for rectification It was irrelevant that the failure to

agree was in a sense a “mistake”

The usual case

Rectification cases usually involve a definite agreement on terms …

… which is then accidentally distorted in the written documents

So a remedy will not normally be given unless there was a common mistake …

… and definite agreement on what the document ought to have said

ExampleIrish Life Assc v. Dublin Land [1989] IR 253

P owned a collection of properties P offered to sell them to D P meant to leave certain properties out

of the portfolio (“the Palmerstown lands”) …

… but by mistake they were left in D never realised that the Palmerstown

lands had been included by accident Sale was agreed

ExampleIrish Life Assc v. Dublin Land [1989] IR 253

The Supreme Court held:

There was no good evidence that D ever knew of the mistake

So there was no common intention to leave out the Palmerstown properties

Rectification was therefore denied

The exception

The courts usually demand a common mistake as to terms

But it seems to be enough if there is

unilateral mistake + fraud i.e. one party is mistaken … … and the other takes advantage of

their mistake

Example 1Gun v. McCarthy (1884) 13 LR (I) 304 G offered to lease premises to M

at £33 per annum M accepted immediately A formal lease was drawn up and

signed In fact, G had meant to ask for £53 … … and M knew that a mistake had

been made (as £33 was absurdly low)

Example 1Gun v. McCarthy (1884) 13 LR (I) 304

Flanagan J held: M must have known that “£33” was an

error, not G’s real intention So some remedy was appropriate But £53 was never actually agreed … … so it was not fair to rectify G’s remedy was to have the lease

cancelled

Example 2Monaghan Council v. Vaughan [1948] IR 306

The council sought tenders to demolish a building

But they offered ambiguous terms

One term was meant to mean that the tenderer must pay £1,200 …

… but it could be read as meaning that the council would pay the tenderer £1,200!

Example 2Monaghan Council v. Vaughan [1948] IR 306

Dixon J held:

The tenderer had seen the ambiguity, and had secretly planned to exploit it

So it was fair to rectify the agreement to reflect the council’s real intention …

… even though the problem was caused by the council’s own carelessness and bad drafting

That's all on

mistake …

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