Consensus ad Idem Lecture notes PDF

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BUSINESS LAW 2 IB237 Consensus ad Idem

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CONSENSUS AD IDEM (Real Agreement) READING: Introduction to Business Law, Third Edition, Lucy Jones, Oxford University Press: pages 192-223 (second edition 194-225). Mistake pages 206-216 (second edition 208-219) Misrepresentation pages 193-205 (second edition194-208) Duress and Undue Influence pages 216-223 (second edition 219-225) Sometimes a contract may appear valid in that there is an offer which is accepted, consideration and an intention to create legal relations but in reality there is no real agreement between the parties. Real agreement is described as ‘consensus ad idem’ and there will be no consensus ad idem for example, where one party is induced to enter into the agreement by a misrepresentation or where one or both parties are mistaken about some essential element relating to the contract. Consensus ad Idem means that there is a REAL agreement between the parties There may not be real agreement if 1.

One/both parties have made a MISTAKE when contracting

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One party MISREPRESENTS factual information

3.

One of the parties enters the deal under DURESS or UNDUE INFLUENCE

1. MISTAKE The general rule is that mistake does not make a contract invalid. This is particularly true where the quality of the goods is called into question. So a purchaser who buys a bracelet thinking that it is 24 carat gold cannot complain if she later discovers that it is only gold plated (assuming that the seller did not provide misleading information). This rule even applies where the seller is aware of the buyer’s mistake providing the seller has not misrepresented the truth to the buyer.

Tamplin v James 1880 The DEF was a bidder at an auction for the sale of some property which he believed also included surrounding gardens. The Particulars of Sale, which were displayed in the auction room indicated that the gardens were NOT included in the sale but the DEF had not read them. The DEF was the highest bidder at the auction but when he realised his mistake he refused to complete the purchase. The CLM sued for breach of contract. Held: The DEF had made a binding contract with the CLM who had accepted his highest bid at the auction. The fact that the DEF made a careless mistake about what he was buying was his own fault and did not affect the validity of the agreement. The DEF was therefore bound to pay the price that he bid for the property.

Such mistakes are known as unilateral mistakes and it is the responsibility of each party to avoid such mistakes. Sometimes however a court will intervene where one party takes advantage of the others’ unilateral mistake.

Hartog v Colin & Shields 1939 PRE-CONTRACTUAL NEGOTIATIONS 

Sale of 30,000 hare skins discussed

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Discussions based on price per piece i.e. per skin

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DEF offered to sell CLM 30,000 Argentianian hare skins

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Offer was in writing

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Price quoted per pound (not per piece) = ERROR which significantly favoured the CLM CLM immediately accepted knowing that the DEF had made an error

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When he realised the mistake the DEF refused to complete the deal

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CLM sued for breach of contract

Held: -

No contract existed between the parties The Def had made a unilateral mistake BUT The Clm had known this and had unfairly taken advantage of it So the agreement should be declared void for mistake and set aside.

In addition, the general rule is relaxed if the mistake was such that there was never a real agreement (consensus ad idem) between the parties. Where the mistake is so fundamental that there is no real agreement the courts will hold that there is no contract. Such a mistake is known as an operative mistake. The approach of the courts will depend upon the type of mistake that has been made.

A). Mistaken signing of a document [Non est Factum] Mistake may be important where a written document was mistakenly signed by one party. If it later becomes apparent that the document that he signed was not what he intended to sign he may be able to avoid the contract by pleading non est factum i.e. not my document. Such a plea will only be successful however if he can show that: 1. The document is radically different from the document that he intended to sign;

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2. His mistake was not due to his own carelessness. 5

Generally, a person who signs a document is expected to read it carefully before signing it and will not be able to get out of the contract if he does not do so and later finds out that the terms are more onerous than he expected. The plea of Non est Factum will only be available if both of the above requirements are satisfied. The following two cases illustrate the approach of the courts.

Foster v Mackinnon 1869 The DEF was an old man with feeble sight. He was befriended by a dishonest young man who owed £3,000 to the CLM. The young man asked the DEF to act as guarantor on a loan he was getting from the bank. The DEF agreed and signed a document handed to him by the rogue, believing it to be the guarantee. But in reality the document that he signed was a note promising to transfer £3,000 to the CLM (the sum of money owed by the young man). The rogue then handed this note to the CLM to discharge his debt and disappeared. When the CLM approached the DEF to claim the payment the DEF refused to pay, saying that he knew nothing about the arrangement. The CLM sued for the money and the DEF argued ‘Non est Factum’ (not my deed).

Held: -

the Def was NOT bound to pay the £3000 because the document signed was invalid the mistake was not due to carelessness and the document was radically different from what he intended to sign

So his plea of Non Est Factum (not my deed) succeeded.

Saunders v Anglia Building Society 1971 (Gallie v Lee) The DEF wished to give her house to her nephew (who had promised that she could live in the house for the rest of her life). X was a friend of the nephew who was training to be a lawyer. He offered to draft the conveyance (transfer of title document) free of charge and the aunt and nephew accepted but X inserted his own name into the document instead of the nephews. The aunt signed the conveyance without checking it (as her reading glasses were broken) and X then used the document to obtain a mortgage from the bank, leaving the title deeds with the bank as security. When the mortgage payments were not met the bank applied to court to remove the DEF from the house so that it could be sold. The DEF argued that there was no binding arrangement with X as the document that she had signed was ‘Non est Factum’ (not my deed). Held: -

the contract was valid the def’s plea of Non Est Factum failed because it was through her own carelessness that she hadn’t read the document properly and it was in fact, precisely the kind of document she was expecting to sign the only difference was the person who was to receive the house.

B). Mistake as to the identity of the other party (See also fraudulent misrepresentation) It is sometimes pleaded by one party that there is no valid contract because he was mistaken as to the identity of the other party to the agreement and he would never have entered into the contract if he had been aware of the other parties true identity. Such a claim will only succeed if it can be shown that: The identity of the other party was of crucial importance; and Reasonable steps were taken to verify the other parties identity before the contract was entered into.

Generally speaking, the approach of the courts is that where the parties are in a face to face situation the identity of the other party is unimportant because it is presumed that the parties intended to contract with the person in front of them, irrespective of his identity.

Phillips v Brooks 1919 X entered a jewellers shop, selected some jewellery and then produced a cheque book in order to pay. The shop assistant (CLM) accepted the cheque but said that X could not have the jewellery until the cheque had been cleared but that the shop would arrange to deliver it to him as soon as clearance had been obtained. X then said to the shop assistant “but surely you must know me, I am Sir George Bullough” and gave an address in St James Square, London. Believing him to be Sir George, the assistant allowed him to take the jewellery away with him before the cheque had been cleared. X had in fact stolen the cheque book from Sir George. X went to a pawn shop with the jewellery and swopped it for cash. When the shop keeper discovered that the cheque would not be honoured he attempted to recover the jewellery from the pawn broker (DEF) claiming that there had been no contract between himself and X since he had been mistaken as to the man’s true identity and would not have sold the jewellery to him had he known his true identity.

Held: The contract between the CLM and the thief was NOT void for mistaken identity. When the agreement was made the CLM had intended to deal with the person immediately in front of him and his identity was unimportant. His identity was only relevant in deciding whether or not to wait until the cheque cleared before handing over the jewellery. So the thief obtained good title to the jewellery which he passed to the DEF, so the DEF was the rightful owner of the property.

Mistaken identity will not be an acceptable plea where the only mistake is in the credit worthiness of the other party.

However, the courts have developed an alternative approach where the parties do not contract face to face but communicate by letter or telephone. In such cases, the courts have generally taken the view that the identity of the other party is important and if there is mistaken identity the contract will be void.

Cundy v Lindsay & Co. 1878 Lindsay & Co. (CLMs) were linen manufacturers in Belfast. A fraudulent person named Blenkarn wrote to them from 37 Wood Street, Cheapside, ordering a large quantity of handkerchiefs but signed the letter in such a way that it appeared to have come from Messrs Blenkiron a well known and successful business operating from 123 Wood Street. Lindsay & Co. mistakenly believed that they were dealing with Messrs Blenkiron and sent the handkerchiefs as requested. Blenkarn then sold the handkerchiefs to Cundy (DEF) and disappeared without paying Lindsay & Co. Lindsay & Co. sued Cundy for return of the goods on the grounds that their contract with Blenkarn was void for mistake of identity so Blenkarn was unable to pass good title to Cundy.

Held: The DEF must return the goods to the CLM because the CLM’s contract with Blenkarn was void for mistaken identity. The CLM had only one person in mind (Blenkiron) when making the agreement and never intended to contract with the thief. The identity of the other party was of crucial importance to the CLM so there was no consensus ad idem when the agreement was formed. It should be noted however that it was crucial to this decision that Lindsay & Co. had confused Blenkarn with another existing business with which they clearly intended to contract. If no such person or business exists then the courts will not accept a plea of mistaken identity.

King’s Norton Metal Co v Edridge, Merrett & Co 1897 A rogue, Wallis, ordered goods by letter from the CLMs who were metal manufacturers. The letter appeared to come from a business called Hallam & Co in Sheffield and was written on impressive headed note paper. In fact, no such company existed. The CLMs sent the goods that had been ordered to the company address and enclosed an invoice requesting payment. Wallis then sold them on to the DEF who bought them in good faith. When the CLMs discovered the truth they sued the DEF for return of the goods claiming that no contract had been formed with Wallis due to mistaken identity and so Wallis could not have passed good title to the DEF.

Held: -

the contract was NOT void for mistaken ID there was no other company known as Hallam & Co whom the Clm had really intended to contract with. So a valid contract was made between Wallis and the Clm and Wallis WAS able to pass good title to the Defs.

In recent years there has been considerable criticism of the fact that the courts distinguish between face to face sales and those carried out at a distance. In 2003 the House of Lords had an opportunity to reconsider this approach and many were in favour of reform.

Hudson v Shogun Finance 2003 But a majority of the House of Lords (3:2) agreed to retain the distinction for the time being. The facts: A rogue pretending to be Mr Patel (whose driving licence he had stolen) selected a car that he wished to buy on credit. The Garage had an arrangement with a Finance Co who agreed to lend the money to Mr Patel to purchase the car. In the course of the negotiations the Finance Co had received documents from the Garage which it had checked and it had also checked the electoral register and County court judgments list. When the rogue had acquired the car he sold it on to Hudson (DEF) and disappeared without paying the loan.

The Finance Co sued Hudson for recovery of the car arguing that their contract with the rogue was void for mistaken identity so he could not pass good title to Hudson. The key issue was whether this was a face to face or distance sale. The car had been purchased face to face but the loan had been arranged at a distance.

The case went to the C/A first where it was held that: 1. Identity was a crucial issue for the Finance Co when agreeing to enter the contract 2. This was not a face-to-face contract as credit dealings were at a distance and the garage was not an agent of the CLM 3. So the ‘contract’ was not legally binding as it was entered into under a mistaken identity and would be set aside for lack of Consensus ad Idem (real agreement).

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The C/A in Hudson v Shogun Finance expressed the view that the state of the law on mistaken identity was very confused and statutory reform was needed

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Given the state of the law, leave to appeal to the H/L was granted but the H/L affirmed the C/A’s view, holding by majority that no binding contract was made between the rogue and the Finance Co, so Hudson had to return the car.

Summary of the law on mistake as to the Identity of the other party

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A ‘contract’ may be set aside if one party is mistaken over the identity of the other and that identity is crucial to the formation of the contract

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Face to face – identity is usually unimportant

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Contracts made at a distance – identity usually matters BUT

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Only if the contracting party believes he is entering into a contract with another business/person that ACTUALLY EXISTS

C). Mistake as to the EXISTENCE or IDENTITY of the subject matter Mistake as to the EXISTENCE of the subject matter of the contract: Where both parties contract in the mistaken belief that a particular thing is in existence when in fact it has ceased to exist there is a fundamental mistake which makes the contract void. So if X agrees to sell his car to Y and both parties believe that the car is at home in X’s garage, there will be no contract if, at the time that the agreement was made and unknown to either party, the car had already been destroyed in a fire. Both parties have made a common mistake and there is therefore no contract. This is known as COMMON or BILATERAL mistake.

Couturier v Haste 1856 Corn was being transported from the Greek port of Salonica to London. The DEF’s (seller) agent in London agreed to sell the corn to the CLM but unknown to both parties the corn had overheated en route so the captain had landed at the nearest port and sold the corn. So at the time that the contract between the agent and the CLM was made the corn no longer existed. The CLM (who had entered into other arrangements based on this deal) sued the DEF claiming that he was in breach of contract for failing to deliver the promised goods. Held: -

The contract was for the purchase of specific goods As those goods no longer existed when the agreement was reached No binding contract was created So the Def wasn’t in breach of contract

This provision can now be found in section 6 of the Sale of Goods Act 1979 which provides ‘where there is a contract for specific goods, and the goods, without the knowledge of the seller, have perished at the time when the contract is made, the contract is void.’

The difference between Mistake as to the Existence of the Subject-Matter and Frustration Mistake applies If the subject-matter no longer exists AT THE TIME THAT THE CONTRACT IS MADE Frustration applies If the subject-matter exists at the time that the contract is made BUT IS DESTROYED BEFORE THE CONTRACT IS CARRIED OUT by events beyond the parties control (impossible to carry out)

Mistake as to the IDENTITY of the subject matter of the contract: Where one party sells goods but the other party thinks that he is buying something different there will be no contract because there is a mistake as to the identity of the subject-matter and so no consensus ad idem.

Raffles v Wichelhaus 1864 The Facts CLM ------makes an offer to sell cotton to --------- DEF DEF-------

accepts offer -------------------CLM

‘125 bales of cotton arriving ex-Peerless from Bombay’ DEF (buyer) is thinking of OCTOBER ship

CLM (seller) is thinking of DECEMBER ship

Held: - Both parties made a mistake about the identity of the subject matter of the contract - So in reality, there was no real agreement between the parties at all (no Consensus ad Idem) - So no contract had been formed and the clm’s action failed.

CONCLUSION The general rule therefore is that mistake will not make a contract void although in certain circumstances, if the mistake is so fundamental that it alters the whole nature of the agreement then there is no real agreement at all and therefore no contract

2. MISREPRESENTATION During negotiations, before forming a contact, the parties frequently make various statements. A statement made during pre-contractual negotiations may become a term of the contract and in such cases, if the statement turns out to be untrue, the innocent party can sue for breach of contract. Even though many pre-contractual statements may be very influential in ensuring that the contract is formed, not all statements made in negotiations become contract terms. If a pre-contractual statement is not a term but it turns out to be untrue, then the innocent party may sue for misrepresentation rather than breach of contract. A misrepresentation is defined as a false statement of fact made by one party to another which induces him to enter into a contract. If the induced party subsequently suffers damage he will be entitled to avoid the contract if he chooses to or alternatively to claim damages. A false statement will only amount to misrepresentation if the statement is made by a party to the contract or his agent. If the statement is made by a third party it will not be actionable. A misrepresentation may be made orally or in writing but the general rule is that silence cannot constitute misrepresentation.

FLETCHER V KRELL 1873 A woman applied for a 12 month post as a governess for the Claimant’s children without revealing that she was a divorcee. When her employer discovered the truth she attempted to rescind the contract on the grounds that the governess had misrepresented the true facts. The court held: that the governess had not misrepresented the truth since she was never asked about her marital status and silence cannot constitute misrepresentation. Consequently the...