Mistake Contract Law Lecture notes PDF

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Lecture 12 – MistakeIntroductionIt is a vitiating factor and can lead to the termination (void) of the contract. - This means that the contract is considered as if it has never existed.It is a VERY complex topic to understand. - It cuts across many areas of law eg; offer and acceptance, consideratio...

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Lecture 12 – Mistake Introduction It is a vitiating factor and can lead to the termination (void) of the contract. • This means that the contract is considered as if it has never existed. It is a VERY complex topic to understand. • It cuts across many areas of law eg; offer and acceptance, consideration, terms, misrepresentation, frustration. Most textbooks distinguish two categories of mistakes: 1. mistakes on the effect of the contract that, if not corrected, would force the contract to operate against the parties’ expectations, thereby nullifying their consent (common mistake); 2. mistakes that arise when one (unilateral mistake) or both parties (mutual mistake) disagree on some important elements of the contract.

Types of Mistake

Common Mistake: • Both parties are wrong about the same assumption which then forms part of their contract.

Unilateral Mistake: • One of the parties makes the mistake but the other party knows the truth.

Mutual Mistake: • 2 parties deal on totally different contract. They are both thinking the wrong thing bit different things.

Timing of the Mistake

Mistake vs Frustration: • The assumption is wrong before entering into the contract = mistake. • The assumption changes after the contract is concluded = frustration.

Common Mistake Both parties were wrong about the same assumption. • The mistake on a basic assumption is so important that if the contract were to be performed, it might lead to a result that none of the parties wants. Bell v Lever Brothers (1932) “Whenever it is to be inferred from the terms of a contract or its surrounding circumstances that the consensus has been reached upon the basis of a particular contractual assumption, and that assumption is not true, the contract is voided: i.e., it is void ab initio if the assumption is of present fact and it ceases to bind if the assumption is of future fact”.

Treat the contract as if it had never existed and put the parties in their original condition: essentially, to make the contract void. • Nullity extends to third parties. • Test in Great Peace Shipping v Tsavliris (2002) Before assessing the presence of a mistake, it is necessary to ensure that the contract does not already allocate the risk, explicitly or implicitly. • McRae v Commonwealth Disposals Commission (1951) Steyn J in Associated Japanese Bank (International) Ltd v Credit du Nord SA [1989] “Logically, before one can turn to the rules as to mistake ... one must first determine whether the contract itself, by express or implied condition precedent or otherwise, provides who bears the risk of the relevant mistake”.

4 types of Common Mistake – situations 1. Subject Matter no longer exists: Parties made a mistake on something that may have existed before, but not when the contract was made. Couturier v Hastie (1856) • Corn was sold but perished before the contract was signed. Therefore, the contract was void as the subject matter did not exist at the time the contract was made. Galloway v Galloway (1914) • Concerns a separation agreement by a couple whose husband’s first wife was found to be still alive (unbeknown to him) at the moment when the second marriage took place. Since bigamy is impermissible in British law, and both parties were mistaken, the contract is treated as thought it was never made. • The second marriage had contractually never occurred. Section 6 of the Sale of Goods Act 1979 reflects the approach of the jurisprudence: “Where there is a contract for the sale of 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.”

2. Subject Matter never existed: The burden of proof is higher as it is assumed it is more difficult to make a mistake on something that never existed. • Must be proven both parties had a similar level of knowledge • And that no party made a promise that the subject matter existed McRae v Commonwealth Disposals Commission (1951) • the Commission sought tenders for the salvage of a tanker lying on a reef. After McCrae won the contract, he discovered that there was neither tanker nor reef. • The court rejected the Commission’s mistake defence because of its superior knowledge: according to the court, they were liable for the reliance damages suffered by McRae.

3.

Performance Impossible:

When performance was and always has been impossible. • Courts consider the contract void provided that neither of the parties were aware of the impossibility. Cooper v Phibbs (1867) • Contract for the lease of a fishery, but the lessor did not have title to it. Contract void.

Couturier v Hastie (1856)–although some parts of the jurisprudencesees this also as a mistake on the existence of the subject matter.

4. Mistake on Quality: A contract can be voided by a quality mistake only when the mistake concerned the essence of the contract. • Eg; A sells a painting to B that turns out to be fake. Earlier test by Lord Atkin in Bell v Lever Brothers Ltd (1932) – mistake is the essence of the contract. – Great Peace Shipping v Tsavliris (five requirements)

Courts apply a very stringent test to declare a contract void. The Court of Appeal in Great Peace Shipping v Tsavliris (2002), mirroring a previous approach in Associated Japanese Bank (International) Ltd v Crédit du Nord SA (1989), provided a series of requirements for common mistake: 1. common assumption on the quality/state of affairs. This means that the contract does not allocate the risk of mistake on either party, or that it states clearly that such quality/state of affair is essential for the implementation of the contract. 2. no warranty by either party; (SAW (SW) 2010 Ltd v Wilson (2017). 3. non-existence of quality/state of affairs not attributable to either party. 4. non-existence make performance impossible. 5. the state of affairs may be the existence, or a vital attribute, of the consideration to be provided or circumstances which must subsist if performance of the contractual adventure is to be possible.

Mutual Mistake Two parties contract with each other on totally different contractual basis without realizing it. • Mistake on the subject matter of the contract. • Mistake on the identity of the parties. Because there is no consideration by either party, there are no actual legal basis for a contract to be valid. Raffles v Wichelhaus W agreed to buy from R 125 bales of cotton ‘to arrive [in Liverpool] ex Peerless from Bombay’. There were two ships called Peerless, and both sailed from Bombay, but W meant the Peerless which sailed in October, and R the Peerless which sailed in December. The court applied an objective test and stated that a reasonable person would not have been able to state with certainty which sailing had been agreed. Therefore, the contract was void as there was no consensus ad idem

An objective view is taken. • What would an average person hearing the parties have indented the contract to mean? • Do not consider the state of mind of the persons.

Unilateral Mistake One of the parties enters into a contract on bases that are not existing, while the other party is aware of that and fails to correct them. • Unilateral mistake sometimes overlaps with misrepresentation; this remedy is useful when the statement does not qualify as misrepresentation. • Parties do not owe a duty of care to each other

The general position was laid down in Smith v Hughes (1871) which dealt with a contract for the sale of old oats: A unilateral mistake does not invalidate a contract even when the other party is aware of it, as long as there is an agreement between the parties.

Unilateral Mistake: Identity The position of courts now is that, in principle, a mistake on the identity will be considered operative only when the two parties negotiated via post/mail or through an agent. • Only exceptionally, courts will accept a defence of mistake when two parties negotiated face-to-face. o Even in this case, however, it is necessary to demonstrate that the claimant intended the contract to be with someone other than the person they are in contact with. Courts follow some rules: • The offer was objectively directed at someone else. Bolton v Jones (1857) – Jones sent an order for some goods (setting off previous debts) to Bolton, mistakenly assuming that the seller was Brocklehurst with whom he previously dealt. Contract voided. •

The identity of the party was clearly stated in the contract. So, a contract is valid only between the parties that appear in the contract. Cundy v Lindsay (1878) – forget signature; and Shogun Finance v Hudson (2003) - seller sold car to a fraudster using the driving license of a third party.

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Contract between parties that are present during negotiations (face to face dealings) cannot be voided for mistaken identities. The contracts are only voidable. This means that bona fide third parties who acquire the good before rescission is exercised are protected. This presumption was confirmed in Shogun Finance v Hudson (2003), and it was first enunciated in Philips v Brooks (1919) and Lewis v Averay (1972). o BUT, other decisions – Lake v Simmons (1927) and Ingram v Little (1961) - have taken the opposite approach, especially when the mistake was induced by fraud. In these cases the contract was voidable.

Because it often deals with fraud. Mistake on the Identity v Mistake on the Attributes. Lord Denning in Lewis v Averay: “A distinction without a difference”. Key difference between face-to-face and distance • A few rules on contract by mail/ agent Effect of contract on third parties • Mistake on the identity is more difficult in face-to-face contracts – Shogun Finance v Hudson (2003) – Contract voidable for misrepresentation

Effects of Mistake & Remedies Rescission Rescission when the mistake is common to both parties and on a fundamental matter of fact.

Non Est Factum In exceptional circumstances, a signed document can be voided and treated as if it was never signed. We call this non est factum. The doctrine applies only in very exceptional circumstances to protect a party who would have otherwise never agreed to the contract. The threshold is very high, and it typically requires the innocent party to be unable to understand what they were signing, or because the nature of the document was misrepresented. • Key case is Saunders v Anglia Building Society (1971)

Rectification of the Contract Rectification is a court order that has the effect of correcting a mistake in the contract by amending its written terms. • Parties can apply for rectification of the contract when they have wrongly recorded their agreement. The standard for rectification was set in Chartbrook Ltd v Persimmon Homes Ltd (2009). In general, courts set a few requirements for rectification. • The contract was not affirmed • Bona fide purchaser • There is a discrepancy between the written terms in the contract and the parties’ objective continuing common intention. See Lord Hoffman’s famous objective intention test – what a reasonable observe would have understood the intention of the parties to be). When the common intention of the parties and the written terms of the contract differ, rectification is possible. o BUT also note that a more recent approach tries to look at the subjective intention of the parties. See, Daventry Dc v Daventry and District Housing Ltd (2011) • •

However, courts cannot ‘create’ new terms of the contract that were not originally present. Daventry DC v Daventry & District Housing Ltd Rectification was until very recently available only for common mistake (hence, the intention of the parties). However, recent cases seem to allow rectification also for unilateral mistake when one party knew of the mistake in the written contract made by the innocent party. o Roberts & Co Ltd v Leicestershire CC (1961); Commission for the New Towns v Cooper (GB) Ltd (1995)

Contract Voided – GreatPeaceShippingLtdvTsavlirisSalvage(2002) – Thisisthecurrentapproach – BonafidethirdpartypurchasersNOTprotected Rectification – Chartbrook Ltd v Persimmon Homes Ltd (2009 – Common mistake • Nowalsoforunilateralmistake,butonlyinonesituation – Bonafidepurchaser – Noaffirmation – Objectiveintentionvtermsofcontract • LordHoffman’stest

Equitable Remedies Equitable relief – SollevButcher(1950) – Rendersthecontractvoidable–rescissionallowed

– Bonafidethird-partypurchasersareprotected – RejectedbyGreatPeaceShipping(2002)...