DOCTRINE OF MISTAKE

The contract is formed. On closer inspection there is something problematic

about that formation. The problem can take a number of forms:
- there is some fundamental error that the parties are labouring under that
affected the contract. (bought the wrong thing)
- where one party misleads that other, and as a result the other party
enters into the contract.
- Where one party threatens the other;
- Where somebody pressurises the other party to enter into a contract
because of the relationship they have with them.

These collecting factors are referred to as vitiating factors. It allows innocent

parties to get out of the contract and they get out of it in two ways, the first way
is to claim that the contract never existed at all. It looked like it did, but in actual
fact it did not. It can also ask the court to set the contract aside. Each of these
remedies are alternate (either/or).
These vitiating factors are as follows:
- Error (doctrine of mistake)
- Deception (misrepresentation)
- Threat (doctrine of duress)
- Improper pressure (doctrine of undue influence)

The claim that the contract never existed is to claim that the contract is void.
The application to set the contract aside is the claim that the contract is voidable
and the remedy is rescission. Voidable means that the contract is treated as
valid until steps are taken to ʹrescindʹ the contract, which from that time on is
treated as being void and of no effect. Rescission is never available in equity as of
right and is subject to the discretion of the court. In particular rescission will not
be granted where an innocent third party has gained a right or interest in the
subject matter of the contract.

Doctrine of mistake
What is mistake?
It’s very tempting to see the word mistake as having the same meaning as in the
English language, but in actual fact doctrine is narrow and applies to a narrow
range of mistakes. So it is not every error in contract that will give rise to the
doctrine of mistake. This range of errors gets narrower by the year; because of
the remedy. The remedy for mistake is to make the contract void. This is the only
time that a contract will be declared void. It is as if the contract never existed. It
is fair to the two parties concerned but the reason that it is problematic, is that it
affects third parties – and there is nothing to sue on. Also, if you bought
something on a void contract, you do not own it therefore you cannot sell it off. It
is rare for courts to find the doctrine of mistake. Don’t be keen to find mistakes.

Categories of mistake
Problem is that books on mistake talk about things thinking they are the same
thing.
Stick to this classification:
There are three types of mistake:
- Common mistake – both parties made the same error. The most common
error is the fact that you think you’re buying something but you haven’t.
- Mutual mistake – in mutual mistake parties talking at cross-purposes
(unlike ‘common’). They are both making a mistake but on different
things.
The confusion tends to come because the courts talk about common mistake and
talk about mutual mistake as one.
- Unilateral mistake: one party makes a mistake (classic case: fraud).
Deceptive misleading.

These three categories can be grouped under two general headings:

1. Agreement is reached but there is something that fundamentally robs
agreement of effectiveness. (Common mistake)
2. Agreement is never reached because there is no correspondence between offer
and acceptance (no consensus ad idem). (Mutual mistake and unilateral
mistake).

Agreement is reached but it lacks efficacy

Common mistake

It is common mistake where both parties make the same mistake and the
contract is formed on the basis of that error.
- The mistake must be fundamental.
- The mistake must occur prior to the formation of the contract, not post. If
error happens after the formation of the contract you need to refer to
doctrine of frustration of contract.

There are four types of common mistake

1. Non-existence of the subject matter (res extincta)
The leading case is Couturier v Hastie [1856] 5 HLC 673
Indian corn was shipped out of Salonica to buyers in the U.K. The cargo
overheated during the voyage and, at some time before the sale was concluded
between the buyer and a del credere agent of the seller, was discharged at Tunis
by the shipʹs master. This was lawful since it constituted a dangerous cargo.
However from the buyer, the agent and the sellerʹs view point the corn had
ceased to exist. The corn was sold off cheaply in Tunis in an attempt to limit
losses. A sale contract had thus been made for a cargo of corn that no longer
existed at the time of sale. Subsequently problems arose over insurance since the
seller was not covered for the loss and the seller sued the del credere agent. A del
credere agent is an agent who receives a higher rate of commission than that
which is usual in return for a guarantee that his principal will receive due
payment for goods sold.
The sale was of the cart of corn en route between Salonica and the UK.
Both parties didn’t realise but the corn had gone bad, and had been trashed and
sold by the masters of the ship in Tunisia prior to the start of the contract.
Therefore, the goods were not in existence by the time contract was made.
The House of Lords held that the buyer was not liable to buy the corn, and
contract was void by mistake. You could not be expected to buy something that
never existed.

In addition, s6 of the Sale of Goods Act 1979 provides that:

“Where there is a contract for the sale of specific goods, and the goods without
the knowledge of the sellers have perished at the time when the contract was
made, the contract is void”.

Contrast this with McRae v Commonwealth Disposals Commission (1950) 84

C.L.R. 377
Commonwealth Disposals Commission invited tenders to purchase wrecked
vessel. Tender for a salvage operation. Vessel was an oil tanker in new Guinea”.
Vessel never existed, and the reef itself doesn’t exist. Interesting thing is that it is
not void for mistake.
High Court of Australia held that McRae succeeded in damages for breach of
contract. They rejected the contract was void because CDC had promised the
tanker did exist. Couturier v Hastie was distinguished because there the parties
had both shared the assumption the corn existed, but here CDC had actually
promised the tanker existed and therefore had assumed the risk that it did not.

Courts: They said it was irresponsible for the Commonwealth Disposals

Commission to advertise gifts that don’t exist. McRae received damages form the
Commonwealth Disposals commission for proof that vessel and reef never
existed. The Disposals Commission were trying to use the doctrine of mistake in
a tactical way to avoid claims for damages.

The doctrine of mistake is catastrophic for third parties as whatever they bought
on a void contract, they have to return to third parties.

Overriding categories – an agreement is reached but there is something wrong

with it; so it held that the agreement was never breached.

2. Mistake as to the Ownership (res sua)

Cooper v Phibbs (1867) L.R. 2 H.L. 149
X agrees to take the lease of a fishery from Y, but unknown to both parties; X
already owns it and does not need to take a lease. So in this case the mistake that
is common to both parties is the ownership of the fishery.
House of Lords sets the contract aside as ‘void for estate’.

3. Mistake as to possibility of performance

This is something stopping you from performing your obligations under the
contract. It is a mistake that is common to both parties.

(a) Legal impossibility

If a contract is legally impossible to form – the law just wont let you do it.
E.g. Cooper v Phibbs (1867) L.R. 2 H.L. 149
- The law will not allow you to sell your own land back to yourself.
 (b) Physically Impossible
The contract may be physically impossible to perform (e.g. It is not physically
possible to get goods you want). A case which exemplifies this is:
Sheikh Brothers Ltd v Ochsner [1957] A.C. 136
There was a contract to deliver 50 tons of sisal, but unknown to both parties the
land on which the sisal is produced is incapable of producing that much. This
category is quite rare, because if you cannot get your sisal from one field you
might be able to get it from another, so it really must be physically impossible in
terms of contract. In this case, the fact that the sisal had to come from a
particular portion of land, satisfied this criterion.
The Privy Council said that the mistake of thinking that the sisal area should be
capable of producing an average of 50 tons of sisal was essential to the
agreement.

(c) Commercially Impossible

Griffith v Brymer [1903] 19 T.L.R 434
(Check this case against the doctrine of frustration of contract).
It is commercially impossible to perform the contract in this case, because the
contract made after coronation of King Edward VII was postponed, and it was all
about the viewing of the coronation.

4. Mistake as to the quality of the subject matter

It is possible to have a mistake in common law: if you have this mistake, the
contract is void.
The problem under this heading is that there is possibility of mistake in equity –
therefore the contract is voidable and not void. Therefore, the innocent party can
apply to have contract set aside, but this does not destroy the contract as a whole
which means that third party rights are generally and can be protected.

Common mistake as to the quality of the subject matter in law.

Bell v Lever Bros [1932] AC 161 (READ)
The defendants are two employees of Lever Brothers who were chairman and
vice-chairman. When they got near to retirement, the company wanted to
reward them in their severance pay. However, unknown to the company, during
their time in office, they had sold cocoa on their own behalf and made a
substantial profit – this was a breach of their director’s duties. This would have
allowed company to terminate their contract immediately, had they known. The
company wasn’t harmed in any way, just the directors benefitted. So when the
time came for them to retire, the company decided to end the directors’ contracts
and pay them severance and a little extra. The company enters severance
negotiation and pays them significant sums each. The company then finds out
directors have been acting on their own behalf and that they could have
terminated their contracts without paying anything – they want the contract
declared void for common mistake. The directors themselves were not aware of
the fact that their contracts would be terminated immediately as a consequence
of their actions. Both parties thought the directors were entitled to high sum of
money.
Quality issue – the amount of money the directors were entitled to. That’s the
mistake. The interesting thing about this mistake is the difference between the
severance pay of £50,000 and 0 (the amount they are actually entitled to). There
is a very big difference in quality.
House of Lords – Lord Atkin: He said it might be possibility to claim mistake
when there was a problem with quality of subject matter. However, it’s actually
going to be very difficult to show common mistake in these circumstances. You
have to show two things for there to be mistake as to quality of subject matter:
1 – a mistake of both parties
2 – the existence of some quality, which makes the thing without the quality
essentially different from the thing as it, was believed to be.
- We’re looking for the quality of the thing being provided being so different
that you might as well be providing something totally different. It has to be
something really, really serious. Atkins said £50,000 was not sufficiently
different.

Lord Thankerton – in relation to the difference in the quality, he said that both
parties must accept and believe that the quality item (the thing that they are
disagreeing over) is an essential part of the contract. There is a difference in the
ratio between both judges.
The thing that overrides both however, is the idea of fraud. Was there fraud in
this case? The fact that there is no fraud, leads them to decide that there was no
common mistake and contract will not be void. Reasoning is different.

Where does that leave us as to common mistake with quality?

Great Peace Shipping Ltd v Tsavliris Salvage (international) Ltd (The Great
peace) [2003] QB 679
This case is about the salvage of a vessel in distress in the Indian Ocean. The
defendant agrees to salvage the ship. They are told that the nearest vessel to the
stricken ship is the Great Peace. Defendants contact owner of the Great Peace
and hire the ship, to go to retrieve the stricken vessel. During the negotiations, no
mention is made about the location of the Great Peace. Defendant believed that
the Great Peace was 35 miles away from stricken vessel, but in fact she was 410
miles away. The defendant didn’t immediately try and set contract aside when
they found this out, they waited until they found a substitute and then they
wanted to set aside agreement and owners of GP sued for breach. There are two
side to this: a claim in common law and a claim in equity.
Claim in common law: There is a mistake as to the quality of the contract itself.
The mistake was the distance of the Great Peace from the stricken vessel.
Question for the Court of Appeal: does that difference in the distance make the
contract essentially different from what the parties had entered into?

Lord Phillips: reviewed Bell v Lever Bros. READ.

He decided that there would be five elements to common mistake:
- common assumption that a particular state of affairs exists.
- There must be no promise on the warranty by either party that a particular
state of affairs exists. – Phillips thought that this came from McRae.
- The non-existence of the state of affairs is not the fault of either of the
parties. If it is the fault then one party can sue for breach of contract. Phillips
thought that this came from McRae as well.
- The particular state of affairs makes the contract impossible to perform.
- That state of affairs relates to a vital attribute of either the consideration
provided or the circumstances of the performance of the contractual
obligation under contract.

If all these things were present, there would be a mistake as to the quality of
subject matter. All of these criteria are not satisfied however, in this case. There
was no mistake and therefore the contract was not void. (He took into count the
fact that defendant delayed whilst finding substitute). Based on the five points
stated he said that the contract would not be void at common law because
contract was clearly not impossible to perform (4), which is why Tsavliris did
not terminate the contract immediately (they knew the contract was possible to
perform)

Second element to common mistake: Common Mistake in equity

This offsets the catastrophic effects of contract if you plead common mistake in
law. It stops contract being void.
The contract becomes voidable not void, thus third parties are protected under
certain circumstances.
Mistake in Equity didn’t look at this until Solle v Butcher [1950] 1 K.B. 671
Butcher gave a high rent to Solle under a mistaken belief, shared by both.
Butcher, the landlord leased a flat to Solle (the tenant/claimant) for a term of
seven years at an annual rent of £250. The flat had previously been let to one
Taylor at £140. Both Butcher and Solle believed that because of the extensive
restructuring to the premises the flat was a new one and hence not subject to
the Rent Restrictions Act 1920 and 1923. This view was incorrect and as a result
the maximum permissible rent allowable under the Act , unless a notice of
increase had been given to the tenant was £140 per annum. Solle commenced an
action in the County court in which he claimed a declaration that the maximum
permissible rent was £140 per annum and that he was entitled to receiver the
excess he had paid under the lease. Butcher counter-claimed for rescission of
the lease on the basis of common mistake.
Held: the common mistake of fact made the contract voidable and it was
consequently rescinded.

The authority of Bell v Lever Bros was challenged in Solle v Butcher. It was
obviously not open to the Court of Appeal in Solle to refuse to follow Bell, given
that Bell is a decision of the House of Lords. The technique used in Solle was to
distinguish Bell on the ground that it was an authority on the doctrine of
mistake at common law and that it did not determine the scope of the doctrine
of mistake in equity. According to the Court of Appeal in Solle, the doctrine of
mistake in equity differed from the doctrine of mistake at common law in three
respects:
- The scope of the doctrine was wider. While the courts in equity also asked
whether or not the mistake was ‘fundamental’, the definition of ‘fundamental’ in
equity was more liberal and so encompassed a broader range of mistakes.
- The effect of the mistake was different in that mistake in equity rendered a
contract voidable, whereas mistake at law, renders a contract void.
- the courts in equity had greater remedial flexibility when setting aside a
contract, in that they could set the contract aside ‘on terms’; that is to say, they
could, within limits, adjust the rights and responsibilities of the parties.

Solle was decided back in 1949 and the Court of Appeal and first instance judges
in a handful of cases, prior to the decision of the Court of Appeal in Great Peace,
relied upon it. During this period, the courts were aware of the uneasy
relationship between Solle and Bell.

The Court of Appeal in Great Peace took a much more robust line and held that
Solle was inconsistent with Bell and should be disapproved. It is an unusual step
for the Court of Appeal to disregard one of its own decisions, especially a
decision which was regarded as good authority for fifty years.
The tension between Solle and Bell was resolved in Great Peace when the Court
of Appeal concluded that Solle should be disapproved on the ground that it was
inconsistent with the decision of the House of Lords in Bell v Lever Bros.

This is a bold decision and on its facts appears to be correct. As it was, the
impact of the mistake on the contract was probably insufficient even to satisfy
the test laid down by Denning LJ in Solle. So on its facts, Great Peace was
correctly decided. The difficulty with the case lies in its formulation of the legal
principles.
The conclusion that Solle cannot stand with Bell is probably right in the sense
that it is inconceivable ‘that the House of Lords overlooked an equitable right in
Lever Bros to rescind the agreement, notwithstanding that the agreement was
not void for mistake at common law. A greater difficult arises from the fact that
the Court of Appeal had followed Solle on a number of occasions and there is a
respectable case for saying that the decision to overrule Solle should have been
left to the House of Lords. On the facts, there was no need for the Court of Appeal
to take steps of disapproving Solle. They could have held, quite simply that the
mistake in this case was, on any view, insufficient to set aside the agreement
either at law or in equity.

This was an invention of Lord Denning. He thought there should be instances

where it is unfair to allow the contract to carry on where there is a mistake as to
the quality of the subject matter – therefore he invented the doctrine of common
mistake in equity and in this case Denning thought it was possible to plead this.

Great Peace comes along and says that is not really appropriate. It was possible
and sufficient in the case to argue that mistake in equity didn’t apply in this
instance (Great Peace) as defendant waited to set contract aside, so there was no
issue of fairness. What happened instead was Lord Phillips revisited the whole
doctrine.
In his review of Bell v Lever – if it had been possible to argue mistake in equity
in Bell the House of Lords would have done it. (Instead they said ‘No fraud, no
fault’) Because the House of Lords didn’t mention mistake in equity, Lord Philips
said you can conclude that they thought mistake in equity wasn’t relevant. He
doubted whether you could ever have mistake in equity.
 The problem we have is that Solle and Great Peace are both Court of Appeal –
so it isn’t possible to overrule Solle with Great Peace, but the strength of Solle’s
precedent is doubted. But what you have is a reinterpretation of Bell so if you
argue that Bell is authority for mistake in equity doesn’t exist then claim gains
strength. Lots of cases based on Solle – so problems either way

Agreement is never reached

Mutual mistake
Essentially parties are talking at cross-purposes.
LATENT AMBIGUITY
Raffles v Wichelhaus (1864) 2H & C 906
The Court of Appeal in Great Peace adopted the traditional understanding of
Raffles, namely that the offer and the acceptance suffered from a ‘latent
ambiguity’ in that while both parties referred to the vessel ‘Peerless’ the buyers
intended to refer to the October sailing, but the sellers intended to refer to the
December sailing. There were no reasons given for the judgment, but it was
decided that the fact that there were two vessels was capable of providing the
defendant buyers with a defence to the seller’s action for the price. This is,
however, a very obscure case and is rarely followed by the courts.

KNOWLEDGE OF MISTAKE AS TO THE TERMS OF THE CONTRACT

Smith v Hughes
The Court of Appeal in Smith distinguished between the case where the plaintiff
believed that the defendant thought he was buying old oats and the case where
the plaintiff believed that the defendant thought that he was buying oats, which
the plaintiff had promised were old. In the former case, the defendant is liable to
take the oats and must take the consequences of his own mistake, whereas in the
latter he is not liable to take the oats on the grounds that the parties were at
cross-purposes as to the terms of the contract.

Unilateral mistake
This involves innocent third parties and is common.
You have entered a contract with a person who is deliberately deceiving you as
to their identity. What normally happens is they obtain property from you before
you have time to register that the cheques have bounced and before you can
register the contract void, they have sold the goods on. Normally, the dispute is
between two innocent parties as to who owns the goods. If the contract is void
for mistake, the original owner of the goods can get the goods back. That’s why
you use mistake in this area, as law would normally let the person in possession
be entitled to goods.

WRITTEN CONTRACTS
- Cundy v Lindsey (1878) 3 App. Cas. 459
A fraudulent person (the rogue) is a person called Alfred Blenkarn. He writes a
letters with the Blenkiron and Co letterhead from 37 Wood Street Cheapside. He
writes to buy goods from the claimant. He signs the letters in such a way that it
looks like it says Blenkiron and Co. Blenkiron and Co are a legitimate firm on 123
Wood Street Cheapside. Blenkarn does live at 37 Wood Street but he lives there,
it is not a business. The claimant is aware of Blenkiron and Co, knows they are a
legitimate business and knows they are on Wood Street. The claimant enters the
contract and sends the goods to 37 Wood Street. The goods are received by
Blenkarn who sells them on. The claim comes to the court between Cundy and
Lindsey. The rogue has absconded. Who is the claimant dealing with? A
legitimate business or the person in front of them (person in the letter). If they’re
dealing with person in front of them, the contract is not void – there is no
mistake as they are dealing with his identity. If they are dealing with the person
they meant it to be – there is a mistake. Courts decided there was a unilateral
mistake in this case as the claimant is only dealing with legitimate company
(Blenkiron and Co).

FACE-TO-FACE CONTRACTS
Face to face contracts are different. The person is physically present but they
deceive you.
Phillips v Brooks Ltd [1919] 2 K.B 243
The rogue goes into the claimant’s shop and chooses jewellery worth £2500 and
a ring for £450. He then writes out a cheque for the amount. He claims to be a
local property developer and then gives his address. He claims to be Sir George
Bullock a wealthy business person and the claimant is aware of a George Bullock
but they have never met. The claimant takes the cheque and asks the rogue
whether he wants to take the jewellery with him. He then takes the ring saying it
is for his wife’s birthday. North (the rogue’s real name) sells the ring to the
defendant in the case, who then disappears and the cheque bounces. It is the
same scenario as with Cundy – is the claimant dealing with rogue or George
Bullock? If North, then he is dealing with the person in front of him and there is
no mistake. If he is decided to be dealing with George Bullock then there is a
mistake.
Courts said there is no mistake. The claimant was swept up in the glory of the
prestigious client and would have sold it to anybody pretending to be that
person.
Contrast with Ingram v Little [1961] 1 Q.B. 31. (Denning)
This case goes the other way and the old lady is deemed to be dealing with the
person she thought it was: there was a mistake. Deemed to be wrong as it
involved old lady and not a jewellery storeowner.

Shogun Finance Ltd v Hudson [2003] UKHL 62

Rogue enters into two contracts as Mr Patel.
1. A written contract for hire-purchase agreement. Uses actual Mr Patel’s driving
license as identity proof.
2. Rogue then goes into car dealership and sells car to car dealer.
Case comes to court as conflict between Shogun and car dealer – how do you
allocate loss? Who owns the car?
The House of Lords revisited this area of unilateral contract (written/face to
face) and approved that distinction.
A unilateral mistake in written contract – operative mistake and contract will be
void.
A unilateral mistake in a face-to-face contract – that will not be an operative
mistake and contract will not be void.
So the effect of that on this scenario is that it would not be possible for rogue to
sell the car to the car dealer, as there would be nothing to sell. Ownership has not
been transferred from rogue to Shogun Finance.

The majority of the House of Lords held that there was no contract between
Shogun Finance and the rogue, so the title of the car was not Mr. Hudson’s. it
followed the presumption that written agreements do not infer a presumption to
sell to the immediate purchaser, where identity is of KEY importance to
contracting. Phillips v Brooks and Lewis v Averay were overruled.