Contract Law - Tutorial 9 PDF

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CONTRACT LAW: TUTORIAL 8 - Mistake Questions for discussion 1. When will courts recognise a mistake as 'operative'? - Mistake = misunderstanding, misapprehension - A mistake will be regarded as operative in the case that it is fundamental enough the contract from being considered legal. o An operative mistake is a mistake in a contract so serious, which means that the contract has no legal effect. - Mistake makes the contract void - Three types: Common (Bilateral), Unilateral, Mutual (both parties make different mistakes) Common (both parties make the same mistake) General rule, mistake must be fundamental if it goes at the root of the contract: Bell v Lever Bros (this was not an operative mistake because it was not fundamental enough, not close enough to subject matter). If the subject matter is specific then it is possible to make contract void, if it a generic goods then the contract goes on, because the good can just be replaced. o Res Extincta: existence of subject matter – Galloway v Galloway, Couturier v Hastie, McRae v Commonwealth Disposal Commission o Res sua: Title – Cooper v Phibbs o Quality of the Subject matter: Great Peace Shipping v Tsavrilis (no equity – Solle v Butcher could not be reconciled with Bell v Lever Bros (this was a House of Lords case so had more importance) while, Solle v Butcher (Denning decided it was a mistake in equity, was a court of appeal case: it was overruled by the House of Lords case, Bell v Lever Bros) common law is very harsh in common law mistakes, which would make the contract void, equity mistake makes the mistake voidable – this was a rental issue, so if the contract would have been void the tenant would have been thrown out)

Possibility of performance: commercial – Griffith v Brymer -

Hotel room booked for purposes of viewing royal procession. Contract concluded after procession had been cancelled. Issue: Could the contract be void for common mistake? Held: Yes, the contract was void because both thought procession going ahead which fundamental to contract so void because the fundamental term of the contract as mistaken and therefore made contract void

and legal (title) – Cooper v Phibbs and physical – Sheikh brothers v Ochsner - It was believed that some land could provide a desired yield, which it couldn’t issue: Could the contract be void? Held: Contract was void because it was an essential term to the contract, that was mistaken, hence was an operative one.

Courts are very harsh as to the quality of the subject matter: it does not make the contract a fundamentally different one from what it used to be. TO SEE IF A MISTAKE IN THE QUALITY OF THE SUBJECT MATTER, YOU APPLIY THE GREAT PEACE SHIPPING TEST ON QUALITY SUBJECT MATTER: 1) common assumption (both are wrong about something) 2) no warranty (if there is a 1

CONTRACT LAW: TUTORIAL 8 - Mistake warranty about something being there then McRae applies), 3) neither party’s are at fault, 4) IMPOSSIBLE TO PERFORM, 5) consideration/ performance (is it super important) Unilateral mistake: one party is mistaken and the other one is aware and seeks to take advantage o Identity (written and face-to-face) – written is more likely to be an operative mistake: written: Cundy v Lindsay, face-to-face: Shogun Finance v Hudson o Shogun Finance v Hudson there is a test. 2. How, if at all, is Bell v Lever Bros. reconciled with Solle v Butcher? Do you find the judgment in Great Peace Shipping Ltd v Tsavliris Salvage (International) Ltd. advances or impedes the doctrine of mistake? No mistake in equity because there is no way to reconcile Bell v Lever Bros and Solle v Butcher - Bell v Lever Bros, according to Lord Atkin’s judgement, gave the authority to the notion that an operational mistake makes a contract void. It was a House of Lords case, which meant that it had the most importance, and it was not reconciled with Solle v Butcher which is a court of Appeal case, with a bit less importance. - The law in relation to common mistake is dominated by two cases: Bell v Lever Bros and Solle v Butcher that was recently overruled by the Court of Appeal in Great Peace Shipping ltd v Tsavliris Salvage. o The central proposition of law is simple; in order to set aside a contract on the ground of common mistake, the mistake must be fundamental and operational o Where the mistake is one as to the existence of the subject matter of the contract or its identity then the mistake is more likely to be fundamental than in the case where the mistake is one as to the quality of the subject matter of the contract (Bell v Lever Bros) - Authority case, although exception: Bell v Lever 1932 – the Lever Brothers entered into an agreement with Bell (an employee) to leave the company in exchange for £30,000 compensation: it was then known that the company could have terminated Bell’s contract without payment as a result of Bell’s involvement in conflicting contracts (he had performed duties which severely breached their role, which would have entitled the brothers to end his employment without compensation). The company therefore sought the compensation of £30,000 believing that this amount had been mistakenly given to Bell. Held: it was held that there was no operative mistake (which is what makes the contract void) and therefore there had been a valid contract. The mistake was purely down to the quality of the contract of service. The mistake was not fundamental to the making of the agreed settlement.

Solle v Butcher: -

Solle and Butcher were partners in an estate agency: Butcher took a lease of a flat that was let at 140 pounds per year at the time and when discussed with Solle, he told him he could charge 250 pounds per year after the repairs are done.

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CONTRACT LAW: TUTORIAL 8 - Mistake In 1947 Butcher let the flat to Solle at 250 price: once the lease was executed, no notice of intention to increase the rent could be given under the Rent Restrictions Act - Solle sued Butcher claiming that the maximum rent was 140 pounds. - Butcher claimed rescission of the contract on the ground of common mistake of fact, innocent material misrepresentation and estoppel. Held: The trial judge held that the flat retained its identity notwithstanding the repairs and that the maximum rent was therefore 140 pounds per year. - He also held that there was no mistake of fact, though possibly one of law, as both parties thought Rent Restrictions Act did not apply. The Court of Appeal held that the lease should be set-aside on terms. -

The judgments reached in these two cases are different: in Bell v Lever, the judgment was the contract was still valid, and could not be rendered void on the basis that it was a mistake to the quality of the contract (which is very rarely considered as being a fundamental and operative mistake), while the contract in Solle v Butcher was “to be set aside on terms”: it was held that there was no mistake on facts, but rather on law (neither party believed that the Rent Restriction Act could apply). Also, it was because the flat retained identity of it as it was before the changes had been made, and therefore the rent remained fixed at £140. Great Peace Shipping Ltd v Tsavliris Salvage International Ltd -

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The appellants agreed to provide salvage services for a vessel called the Great Providence, which was in serious difficulty in the Indian Ocean. The defendants contacted the Ocean Routes to see if there were any vessels close by: they were told that the Great Peace was proximate to the vessel. They contacted the owners of Great Peace and orally contracted; the defendants agreed to hire the Great Peace for a minimum of five days. During that conversation, it was not mentioned what was the position of the vessel. The defendants believed that the vessels were 35 miles apart when it was actually 410 miles. The defendants did not attempt immediately to set aside the contract and cancel it but they waited to see if they can find any other to provide the necessary services Once they did, they cancelled the contract and the Great Peace sued them for a 5 day hire but defendants refused to pay on two grounds They said the agreement was void at common law for fundamental mistake and that the agreement was voidable in equity.

Both defences were rejected by Toulson J and the Court of Appeal Was the distance between the two vessels so great as to confound the assumption and to render the contractual adventure impossible of performance? In other words, it the distance a fundamental part of the contract to make it void under the doctrine of mistake? - Toulson suggested that because the Great providence did not want to cancel the agreement until they knew if they could find a nearer vessel to assist, they evidently did not regard the contract as devoid of purpose, or they would have cancelled at once. - He also argued that the Great providence could have moved and met the ship halfway HOWEVER; The counsel for appellants rejected the idea that the Great Providence should have steamed ahead and met the salvage ship halfway (how could they?) - He also believed it was not legitimate for the judge to have regard to the fact that the appellants did not want to cancel their agreement with the Great Peace until they knew if there was a nearer vessel to assist; the fact that the vessels were further apart than both parties appreciated did not mean that it was impossible to perform the contractual adventure. - Also, there was nothing unjust about cancelling the contract; the contract gave the appellants an express right to cancel the contract subject to obligation to pay the cancellation fee of 5 -

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CONTRACT LAW: TUTORIAL 8 - Mistake days hire. Once they cancelled, they became liable in consequence to pay the cancellation fee. There is no injustice in this result.

- This case shows how narrow is the doctrine of mistake; very few contracts are held void under this doctrine; exceptions are Couturier v. Hastie, McRae v Commonwealth Disposal, and Associated Japanese Bank v Credit du Nord SA. o At the first stage, the Court must decide whether or not the contract has become impossible of performance as a result of unforeseen circumstances and then secondly, the court must decide whether on the true construction of the contract, one or other party has undertaken responsibility for the existence of the assumed state of affairs. - The requirement that the contract must be impossible of performance is likely to make it very difficult to set aside a contract on the ground of a mistake as to quality. o The more difficult question is whether or not impossibility should be an indispensable element in a mistake case - The second point to note is the emphasis placed by the Court of Appeal upon the importance of the construction of the contract. 3. A and B are art collectors. A has a picture that may be a Rembrandt. A offers to sell it to B. Discuss the following problems. (i) A says to B: "It's a Rembrandt all right", whereupon B buys the picture. It is not a Rembrandt. - THIS IS NOT A MISTAKE: THIS IS MISREPRESENTATION – IT IS ABOUT THE QUALITY OF THE SUBJECT MATTER, SO USE THE TEST. THERE IS A WARRANTY (it is Rembrandt) THEREFORE IT CANNOT BE AN OPERATIVE MISTAKE. TO SEE IF A MISTAKE IN THE QUALITY OF THE SUBJECT MATTER, YOU APPLIY THE GREAT PEACE SHIPPING TEST ON QUALITY SUBJECT MATTER: 1) common assumption (both are wrong about something) 2) no warranty (if there is a warranty about something being there then McRae applies), 3) neither party’s are at fault, 4) IMPOSSIBLE TO PERFORM, 5) consideration/ performance (is it super important) (ii) A and B mistakenly believe it is a Rembrandt and B purchases it for £500,000. - This is a common mistake, where both parties are mistaken about the quality of the subject matter: the question is whether the contract is void or not where the parties to the contract do no believe the subject matter has the anticipated quality. - YOU HAVE TO RUN THE TEST ON QUALITY, SO THE GREAT PEACE TEST: IT IS STILL POSSIBLE TO PERFORM AND THEREFORE THE TEST HAS FAILED AND THE MISTAKE DOES NOT RENDER THE CONTRACT VOID. TO SEE IF A MISTAKE IN THE QUALITY OF THE SUBJECT MATTER, YOU APPLIY THE GREAT PEACE SHIPPING TEST ON QUALITY SUBJECT MATTER: 1) common assumption (both are wrong about something) 2) no warranty (if there is a 4

CONTRACT LAW: TUTORIAL 8 - Mistake warranty about something being there then McRae applies), 3) neither party’s are at fault, 4) IMPOSSIBLE TO PERFORM, 5) consideration/ performance (is it super important) Authority case, although being an exception: Bell v Lever 1932 – the Lever Brothers entered into an agreement with Bell (an employee) to leave the company in exchange for £30,000 compensation: it was then known that the company could have terminated Bell’s contract without payment as a result of Bell’s involvement in conflicting contracts (he had performed duties which severely breached their role, which would have entitled the brothers to end his employment without compensation). The company therefore sought the compensation of £30,000 believing that this amount had been mistakenly given to Bell. Held: it was held that there was no operative mistake (which is what makes the contract void) and therefore there had been a valid contract. The mistake was purely down to the quality of the contract of service. The mistake was not fundamental to the making of the agreed settlement.

Cases can also be found in which a mistake as to quality has been held to be sufficiently fundamental to set aside a contract (iii) A thinks it is a "school of Rembrandt" picture, but B thinks it is an original. - This could be the case of mutual mistake: both parties have made different mistakes (one believes it to be of the school of Rembrandt, and the other thinks it is an original, but both are wrong) o It could also be the case that they are at cross purposes: the parties do not understand that there is a misunderstanding between them – the misunderstanding being that one believes it to be of the school of Rembrandt, and the other thinks it is an original, but both are wrong.  There is a lack of consensus ad idem: there is a lack of both parties having the same understanding of the terms of the contract. - If there is uncertainty or misunderstanding as to the subject matter of the contract, this will also render the contract void. Supporting case: Scriven Bros v Hindley 1913 – at an auction, a bidder mistakenly bought a quantity of tow believing it was hemp (which had a greater value), because the auctioneer had wrongly labelled the cargo when it arrived – once the purchased tow arrived and the buyer realised it was not hemp he refused to pay. Held: the court decided that there was no chance of the matter being resolved to the satisfaction of both parties, and no third party would have been capable of concluding whether the contract was for hemp or tow, therefore the contract was declared void. - Where one party is mistaken as to the quality of the good but the contract may

still be performed, the contract will not be void Smith v Hughes 1871 - Smith agreed to purchase some oats from Hughes to feed his racehorse. Hughes delivered green oats (also known as new oats) to Smith. Racehorses cannot be fed on green oats, they must be fed on much more expensive ‘old oats’ which Smith believed he was going to get. Issue: Could the contract be avoided as Hughes had delivered the wrong type of oats. Held: No avoidance, contract remained in place. Smith had not pointed out the potential confusion to Hughes. There was no reason to believe, from their communication, that Smith explicitly required old oats. Affirmation of the principle of buyer beware, and that contractual agreements are objectively judged.

(iv) Same as (iii) but A knows B thinks it is an original 5

CONTRACT LAW: TUTORIAL 8 - Mistake - Unilateral mistake as terms of the contract: one knows that it is not a Rembrandt. (v) B thinks A is warranting the picture to be original, but A is not. - One thinks there is a warranty, but it is just a thought – this is a mutual mistake because they are at cross purpose: case – Scriven Bros v Hindely (vi) B thinks A is warranting the picture as original. A knows this, and has no intention of warranting it. - Unilateral mistake, as to terms because there is a mistake about the painting. In all these cases, none of the mistakes were fundamental enough to make the mistake void: courts are harsh because they want to augment certainty of the commercial process, and not allow parties to easily exit the bad bargain. 4. Lorenzo is a celebrated clothes designer. He decides to place crushed velvet trousers at the centre of his line of clothing for men. He visits Millicent’s fabric shop. Millicent shows him several samples of crushed velvet from which Lorenzo selects a heavy velvet fabric known as ‘Lux-ovelvet’. He orders 10,000 metres of fabric at a cost of £50,000. When he does this, he tells Millicent that 500 metres of the fabric are for his brother, Norbert, who intends to make men’s cravats for them. This will be the first time that Norbert has produced clothing. Lorenzo pays for the Lux-o-velvet fabric upon delivery. When his employees begin to work upon the fabric, it transpires that Lux-o-velvet is suitable only for upholstery and not clothing. Advise Lorenzo and Norbert. - I would identify this mistake as being an unilateral mistake: this is because one of the parties, Lorenzo, is entering the contract (purchase of fabric) under a mistake (the fabric is not supposed to be used for clothing but rather only for upholstery) and the other party, Norbert is aware (presumable since he visits a fabric shop, hence the worker or owner should at least have basic understanding of the fabric and its use), however he is seeking to take advantage of the mistake: he is selling 10,000 meters of fabric at the cost of £50,000. o It cannot be argued that there was a misunderstanding as to the use of the fabric, as although it could be said that Lorenzo did not specify what he was going to use the fabric for, he did specify that 500 meters of this would go to his brother whose intention was to make men cravats. Although this was a much less amount of fabric devolved to the brother, Norbert should have none the less informed both Lorenzo and his brother that the fabric was not be used for clothing making. - When expressing their intentions, if a party makes a mistake and the other part is aware (or the circumstances suggest they should have been aware) then the mistake will be operative and hence void.

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CONTRACT LAW: TUTORIAL 8 - Mistake Supporting case: Smith v Hughes – however the mistake is not operative: you wanted velvet, you got velvet (like in the case you wanted oats you had oats), you cannot sell it for a high price, but you can still sell it. Hartog Colin v Shields (1939) – the contract involved the sale by the defendant of 30,000 Argentine hare skins at 30d per skin. The claim brought action to hold the defendants to a written offer when they later mistakenly sold the offered skin for 10b per lb (which was a third of the originally discussed price). The contract was declared void with the court saying that the claimant must have known about the mistake and the material mistake concerned the terms of the contract (price per pound as opposed to per skin)

4. Andy finds a credit card with the name ‘Bob Baker’ on it. Foolishly, Bob Baker has written his pin number on the back of the card. Andy decides to stay at an expensive hotel, Crummy Towers. He checks into the hotel by using its automated check-in machine. To check in, he is required to insert his credit card in the machine and enter the pin number. As he is doing this, he is simultaneously monitored on a close circuit television camera placed at the top of the machine. Andy checks in as ‘Bob Baker’ and uses Baker’s credit card and pin number. After the Crummy operator has looked at Andy on the television screen and checked the details of Bob Baker in a database, he is allowed to enter the hotel. Crummy offers special shopping services to all of its guests. Guests are able to select items fro...