MistakeMistakeMistake

Mistake

• Mistake can only refer to mistake of “fact”.• It cannot be mistake of “law” – ignorantia juris

haud excusat

• Types of mistake :1) Common Mistake

2) Mutual Mistake

3) Unilateral Mistake

Introduction

Both parties make the same error relating to a

fundamental fact.

3 Categories :-a) Res extincta – Mistake as to existence of subject matter

b) Res sua – Mistake as to title

c) Mistake as to the quality of the subject matter.

(1) Common Mistake

A contract will be void if the subject matter of the agreement is non-existent.

Example :-A contract for the sale of specific goods. But the goods, without the knowledge of the sellers, have perished at the time when the contract was made the contract is void.

(a) Common Mistake @ Res Extincta(Mistake as to the subject matter)

Couturier v Hastie (1856)* Strickland v Turner (1852) Galloway v Galloway (1914) Couturier v Hastie

Couturier v Hastie was interpreted differently by the High Court of Australia in :

McRae v The Commonwealth Disposals Commission (1950)

Couterier v Hastie (1856)

• A buyer bought a cargo of corn which both parties believed to be at sea, being transited from Salonica to the UK

• In fact, the cargo had become fermented and had already been sold by the master of the ship to a purchaser at Tunis.

Held :• Contract was void.• The Buyer not liable for the price of the cargo.

McRae v Commonwealth Disposals Commission (1950)

• The Commission sold to McRae the right to salvage a tanker lying on a specified reef.

• There was no such reef of that name, nor was there any tanker.

Held• The commission had impliedly guaranteed the existence

of the tanker. • Therefore the court found that there was a valid contract• The case is distinguished on the ground that there had

never been a tanker and it had, therefore not perished.

• Whether a contract was void or valid depends on the construction of the contract.

• Even if the subject matter did not exist, the contract will be valid if :-(a) performance was guaranteed (McRae) or(b) it was the purchase of a ‘chance’ (eg : the purchase of all gold found in field X. If no gold is found in field X, the contract remains valid.)

• Otherwise, the contract would be void.

Distinguishing McRae from Couturier

• Where a person makes a contract to purchase things that already belongs to him, the contract is void.

Cooper v Phibbs (1867) • Cooper not realizing that a fishery already belonged

to him, agreed to lease it from Phibbs.

Held

• Contract was void.

(b) Common Mistake @ Res Sua(Mistake as to title)

“Mistake of both parties about the existence of

some quality which makes the thing without the

quality essentially different from the thing as it

was believed to be.”

Lord Atkin in Bell v Lever Bros Ltd [1931]

(c) Common Mistake @ Mistake as to quality of subject matter

Bell v Lever Bros Ltd [1931] • Lever (plaintiff) contracted with Bell, to act as chairman and vice-

chairman of a subsidiary company. • Later, the parties agreed that Lever should resign their positions in

consideration of payments by way of compensation. • Lever had engaged in private transactions resulting in secret profit to

themselves, without Bell’s knowledge • These transactions constituted breaches of the Lever’s contracts, which

would have entitled Bell to terminate those contracts, if they had known of the transactions.

Held• The erroneous belief on both parties to the agreements, that the service

contracts were determinable except by agreement did not involve the actual subject-matter of the agreements, but merely related to the quality of the subject-matter

• So it was not of such a fundamental character as to constitute an underlying assumption without which the parties would not have entered into the agreements (going to the root of the contract)

• therefore, the plaintiffs were not entitled to succeed in their action.

• In cases since Bell v Lever Bros the courts have not been over-ready to find a mistake as to quality to be operative.

See:• Solle v Butcher [1949] • Leaf v International Galleries [1950] • Harrison & Jones Ltd v Bunten &

Lancaster Ltd [1953] • Associated Japanese Bank Ltd v Credit du

Nord [1988]

Leaf v International Galleries [1950]

• Both parties mistakenly believed that a pianting was by Constable, the Court of Appeal stated that the contract was not void for common mistake.

• In Solle v Butcher (1950), the CA declined to declare void a lease which both parties believed was not subject to the Rent Acts.

• A similar stance was taken in Grist v Bailey (1967) where the parties both believed that a house was subject to a protected tenancy. Contract was held to be valid at common law.

• In Harrison & Jones Ltd v Bunten &Lancaster (1953) both parties believed that Calcutta Kapok was pure Kapok and the contract was held to be valid still, at common law.

• As result of all these cases, although the mistake seemed fundamental and yet the court was not willing to hold the contracts void at common law…. This has led to an argument by Cheshire, Fifoot and Furmston, amongst others, that a mistake concerning quality will not render a contract void.

Associated Japanese Bank v Credit du Nord (1988)

• However, Steyn LJ stated obiter that a contract will be void ab initio for common mistake if a mistake by both parties to the contract renders the subject matter of the contract essentially and radically different from that which both parties believed to exist at the time the contract was executed.

• He gave the following example : if a horse believed to be sound turns out to be unsound,

then the contract remains valid, but if a horse believed to be a race horse turns out to be a cart horse, then the contract is void.

• However, the party seeking to rely on the mistake must have had reasonable grounds for entertaining the belief on which the mistake was based.

COMMON MISTAKE AS TO QUALITY OF SUBJECT MATTER- AT EQUITY

• Where a contract is void for identical mistake, the court exercising its equitable jurisdiction,

can:• Refuse specific performance• Rescind any contractual document between the

parties and may or may not impose terms between the parties, in order to do justice.(rescission)

• Relevant cases include:• Solle v Butcher [1949]

Grist v Bailey [1966] Magee v Pennine Insurance [1969]

• Rescission for mistake is subject to the same bars as rescission for misrepresentation.

Solle v Butcher [1949] • In 1931 a dwelling house had been converted into five

flats. • In 1938 Flat No. 1 was let for three years at an annual

rent of £140. In 1947 the defendant took a long lease of the building, intending to repair bomb damage and do substantial alterations.

• The plaintiff and defendant discussed the rents to be charged after the work had been completed. The plaintiff told the defendant that he could charge £250 for Flat 1.

• The plaintiff paid rent at £250 per year for some time and then took proceedings for a declaration that the standard rent was £140. The defendant contended that the flat had become a new and separate dwelling by reason of change of identity, and therefore not subject to the Rent Restriction Acts.

•

Solle v Butcher [1949]

• The Court of Appeal held that (i) the structural alterations and improvements were not

such as to destroy the identity of the flat as let in 1939, (ii) on the evidence, the parties had addressed their minds to the material issue of identity of the new flat, and their mistake or common misapprehension as to whether the flat had been so altered as to destroy its identity was a mistake of fact, and the landlord was entitled to have the lease set aside in equity on such terms as the court thought fit.

Magee v Penine Insurance [1969] • The plaintiff signed a proposal form, filled in by

his son, for the insurance of a motor car. There were a number of mis-statements in the proposal, in particular it was mis-stated that the plaintiff held a driving licence. The proposal was accepted by the defendant insurance company. The car was accidentally damaged and the plaintiff made a claim in respect of it. The insurance company offered £385 in settlement of the claim which the plaintiff accepted. The insurance company then discovered the mis-statements in the proposal form and refused to pay.

Magee v Penine Insurance [1969]• Court of Appeal held: that on its true construction, the insurance

company's letter was an offer of compromise and not merely an offer to quantify the claim, but judgment would be given for the defendant insurance company on the following grounds:

• (per Lord Denning MR) although the acceptance by the plaintiff of the insurance company's offer constituted a contract of compromise binding at law, the parties were acting under a common and fundamental mistake in that they thought that the original policy was good and binding,

the contract was therefore voidable in equity, and it would be set aside because in the circumstances it was not equitable to hold the insurance company to it

Great Peace Shipping v Tsavliris Salvage (International) (2002)

• This is the latest decision on common mistake as to quality of subject matter.

• Discuss the case and think about the position law now.

• Do you think it is correctly decided?

• Both parties misunderstood each other’s intention.

• If both have cross purposes, the court will apply an “objective test”.

Objective Test

Whether a 'reasonable man' would take the agreement to mean what one party understood it to mean or what the other party understood it to mean.

Mutual Mistake

• If the test leads to the conclusion that the contract could be understood in one sense only, both parties will be bound by the contract.

• If the transaction is totally ambiguous, then there will be no consensus ad idem (agreement as to the same thing) - contract will be void

Wood v Scarth (1858) Raffles v Wichelhaus (1864) Scriven Bros v Hindley & Co [1913] Smith v Hughes (1871)

REMEDY

• If the contract is void at law on the ground of mistake,

• equity "follows the law" and specific performance will be refused and, in appropriate circumstances, the contract will be rescinded. However, even where the contract is valid at law, specific performance will be refused if to grant it would cause hardship.

• Thus the remedy of specific performance was refused in Wood v Scarth.

• Only one party is mistaken.

• 2 Categories :-a)Unilateral mistake concerning the terms of the contract.

a)Unilateral mistake as to the identity of the other party to the contract.

Unilateral Mistake

• Where one party is mistaken as to the nature of the contract and the other party is aware of the mistake, or the circumstances are such that he may be taken to be aware of it, the contract is void

• For the mistake to be operative, the mistake must be as to the terms of the contract itself.

Hartog v Colin & Shields [1939] Seller mistakenly offered to sell goods at a given price per

pound when they intended to offer them per piece.

a) Unilateral mistake concerning the TERMS of the contract.

• A mere error of judgment as to the quality of the subject matter will not suffice to render the contract void for unilateral mistake.

Smith v Hughes (1871) Contract was for sale of ‘oats’ not ‘old oats’

REMEDY• Equity follows the law and will rescind a contract

affected by unilateral mistake or refuse specific performance as in:

• Webster v Cecil (1861) def, previously refused claimant’s offer of £2000 for his land, wrote to claimant offering to sell him for 1250 instead of 2250 as intended. Claimant accepted offer. Specific performance refused- claimant must have been aware of the error (unilateral mistake)

• Where there is no blame on claimant the situation is more difficult.

• Malins v Freeman (1837), the def had mistakenly bought wrong property at an auction. Specific performance was refused.

• Tamplin v James (1880)- court ordered specific performance where def. bid for a property under an error as to its true extent.

• Here one party makes a contract with another, believing him to be someone else.

• The law makes a distinction between contracts where :-

i) the parties are inter absentes

ii) the parties are inter praesentes.

b) Unilateral mistake as to IDENTITY

Contract made Inter Absentes

• Where the parties are not physically presence (eg : dealing by correspondence)

• One party is mistaken as to the identity, not the attributes, of the other

• Actually, he intends to deal with an identifiable 3rd party, and the other knows this

• The contract will be void for mistake.

Cundy v Lindsay (1878)

Cundy v Lindsay [1878] • A rogue named Blenkarn ordered goods in writing from Lindsay & Co. • He gave his address as "Blenkarn & Co, 37 Wood Street, Cheapside"

and signed the letter in such a way that the name appeared to be "Blenkiron & Co".

• A very respectable firm known as Blenkiron & Sons which carried on business at 123 Wood Street was well known to Lindsay.

• Lindsay did not ascertain their correct address and dispatched the goods to "Blenkiron & Co, 37 Wood Street, Cheapside."

• Blenkarn sold some of the goods to Cundy in the ordinary course of business before the fraud was discovered.

Held• Lindsay knew nothing of Blenkarn and intended to deal only with

Blenkiron, a fact which was known to Blenkarn• there was no common intention which could lead to any contract

between the parties• therefore, the property in the goods remained in Lindsay and Cundy

had no title to them.

• In order to claim a mistake on the basis of a mistaken identity, the party seeking to claim rights in the goods must show that he intended to contract with a person other than the one whom he did in fact contract.

Very important to establish :-a) There must be another such person (or company)b) The mistake must be as to identity, not attributes.

King's Norton Metal Co Ltd v Edridge Merrett Co Ltd (1897)

Shogun Finance v Hudson (2004)

Contracts made Inter prasentes

• Where the parties are dealing ‘face-to-face’ (inter praesentes)

• It is assumed that the mistaken party intends to deal with the other person who is physically present and identifiable by sight and sound, irrespective of the identity which one or other may assume.

For such a mistake to be an operative mistake and to make the agreement void, the mistaken party must show that :-

(i)they intended to deal with someone else;

(ii)the party they dealt with knew of this intention;

(iii)they regarded identity as of crucial importance;

(iv)reasonable steps has been taken to check the identity of the other person

Effect of Inter prasentes contract

• Even where the contract is not void, it may be voidable for fraudulent misrepresentation

• If the goods have passed to an innocent 3rd party who pays good value for it before the contract is avoided, that 3rd party may acquire a good title.

Phillips v Brooks [1919] Ingram v Little [1960] (a controversial case) Lewis v Avery [1971]

• “Not my deed”

• General rule : a person is bound by their signature to a document, whether or not they have read or understood the documentL'Estrange v Graucob [1934]

• However, where a person has been induced to sign a contractual document by fraud or misrepresentation, the transaction will be voidable.

Mistake concerning signed documents“Non est factum”

• This rule is to protect people who are illiterate

• A successful plea of non est factum void the document Foster v Mackinnon (1869)

• to succeed, 2 factors have to be established :-(i) the signer was not careless in signing; and(ii)there is a radical difference between the document

signed and what the signer thought he was signing. Saunders v Anglia Building Society (Gallie v Lee) [1970]

• Note: Because of the strict requirements, it may be better for the innocent party to bring a claim based on undue influence.

1) Common law remedy2) Equity remedy

Common Law remedy• contract is “void ab initio” from the beginning.• no property will pass and no obligations can arise under

it.

Equity remedy• If the contract is valid under common law, in may still be

voidable under equity law• Contract may be rescinded• Property will continue to be passed and obligations will

arise unless / until the contract is rescinded. • However, the right to rescission may be lost.

Remedies for Mistake