BetterLawNotes-5 (2)

CONTRACT LAW

Introduction

Common mistake covers those cases where, while the parties are genuinely agreed, they have entered into the contract on the basis of a shared, ie common, mistake. The general rule of English law is that such a mistake will not affect the validity of the contract: both parties remain bound on discovery of the mistake. A common mistake will, it seems, only render the contract void where the mistake makes performance of the contract ‘impossible’.

Starting Point

‘Logically, before one can turn to the rules as to mistake, whether at common law or in equity, 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. It is at this hurdle that many pleas of mistake will either fail or prove to have been unnecessary. Only if the contract is silent on the point, is there scope for invoking mistake.’

Associated Japanese Bank (International) Ltd v Credit du Nord SA [1989] 1 WLR 255, 268 (Steyn J).

McRae v Commonwealth Disposals Commission (1951) 84 CLR 377

The defendant invited tenders for the purchase of a wrecked oil tanker lying on the Jourmand Reef off the coast of New Guinea. The claimant’s tender of £285 was accepted and the claimant incurred significant expense in preparing a salvage operation. In fact there was no tanker in the area indicated nor a Jourmand Reef. At first instance Webb J held that the contract was void for mistake. On appeal, the High Court of Australia held the contract was valid and the defendant was liable for damages for breach.

‘It is not a case in which the parties can be seen to have proceeded on the basis of a common assumption of fact so as to justify the conclusion that the correctness of the assumption was intended by both parties to be a condition precedent to the creation of contractual obligation . . . The only proper construction of the contract is that it included a promise by the by the Commission that there was a tanker in the position specified. The Commission contracted that there was a tanker there. . . ‘

Dixon and Fullager JJ.

William Sindall plc v Cambridgeshire CC [1994] 1 WLR 1016

The purchaser agreed in December 1988 to purchase land from the vendor for £5,082,500. The land had previously been used as school playing fields. The contract incorporated the National Conditions of Sale (20th ed). Condition 14 provided that without prejudice to the vendor’s duty to disclose all latent easements and liabilities known to it, the property was sold subject to, inter alia, any easements, liabilities and public rights affecting it. Special condition 17(e) provided that the purchaser was deemed to purchase with full notice and subject to ‘all easements . . . rights and privileges (whether of a public or private nature) now affecting the property but without any obligation on the part of the vendor to define the same’. The vendor replied to inquiries before contract on a standard form stating that so far as it was aware there were no rights of easement or public rights affecting the property other than those disclosed in the contract. The purchase was completed in March 1989. The purchaser applied for planning permission for 60 houses and 30 flats on the site, but this proved much more difficult to obtain than the purchaser had anticipated, taking 18 months and an appeal to the Secretary of State. By the time it was granted the property market had collapsed, the site being worth less than half of the purchase price. The purchaser’s position was exacerbated by the fact that it had borrowed the entire purchase price, leading to interest charges of £2,000 a day.

In October 1990 a private foul sewer built in 1970 was found under the site. This ran diagonally across the site draining a property on one boundary to a public sewer located on another. The judge found that a sewer needs a six-metre-wide maintenance strip to be left vacant above it. The presence of the sewer meant that the purchaser could not proceed with its development as planned and it purported to rescind the sale contract on grounds of misrepresentation and common fundamental mistake. The vendor suggested that the purchaser divert the sewer, and it was subsequently found that a diversion would have meant the loss of a single plot from the development. Sindall refused to consider a diversion. Instead, the vendor undertook construction of an alternative sewer for the relevant property, at a cost of £54,000, thereby rendering the existing sewer redundant.

The vendor purported to rescind the contract on the grounds of misrepresentation and common mistake and sought repayment of the purchase price together with interest. The Court of Appeal, reversing the decision of the judge held that there had been no misrepresentation, and the contract was not liable to be rescinded either for misrepresentation or common mistake.

‘The judge found that in the absence of any actionable misrepresentation, Sindall was entitled to rescind the contract for a common mistake as to the existence of a sewer. This is at first sight a startling result . . .

When the judge speaks of the contract allocating risk ‘by express or implied condition precedent or otherwise’ I think he includes rules of general law applicable to the contract and which, for example, provide that, in the absence of express warranty, the law is caveat emptor. This would, in my view, allocate the risk of an unknown defect in goods to the buyer, even though it is not mentioned in the contract. Similarly, the rule in Hill v Harris that a lessor or vendor does not impliedly warrant that the premises are fit for any particular purpose means that the contract allocates the risk of the premises being unfit for such purpose . . .

In this case the contract says in express terms that it is subject to all easements other than those of which the vendor knows or has the means of knowledge. This allocates the risk of such incumbrances to the buyer and leaves no room for rescission on the grounds of mistake.’

Hoffmann LJ at 1034-1035.

Bell v Lever Bros [1932] AC 161

‘It is of paramount importance that contracts should be observed, and that if parties honestly comply with the essentials of the formation of contracts – ie agree in the same terms on the same subject-matter – they are bound, and must rely on the stipulations of the contract for protection from the effect of facts unknown to them.’

Lord Atkin at 224.

Existing mistake as at the date of the contract

The law of mistake applies to a state of affairs existing at, or an event occurring before, the date of the contract. Where performance of the contract becomes impossible because of an event occurring after the contract is made, mistake is not relevant. Instead, we must turn to the doctrine of frustration (which will be covered immediately after mistake).

Amalgamated Investment & Property Co Ltd v John Walker & Sons Ltd [1977] 1 WLR 164

D wished to sell a warehouse. It was advertised as suitable for occupation or redevelopment. C, to the knowledge of D, wanted to redevelop the property.

In its pre-contractual enquiries, C asked whether the property was designated as a building of special architectural or historic interest. On 14 August D gave a negative answer to the question.

Unknown to the parties the property had been provisionally selected by the Dept of the Environment for inclusion in the list of designated buildings.

On 22 August, the property was unconditionally selected for inclusion on the list.

On 25 September, C signed the contract agreeing to buy the property for £1.71m.

The following day, the DoE wrote to D informing it that the property had been included on the list of buildings of special architectural or historic interest, and that the list was about to be given legal effect.

Legal effect was given on the following day when the list was signed on behalf of the SoS.

The judge found that without redevelopment potential the property was worth £1.5m less than the contract price.

C sought rescission of the contract on the ground of common mistake.

Plowman V-C, with whose conclusions the CA agreed, said the issue of common mistake did not arise. The crucial date was the date of the actual listing, which occurred after the contract had been entered into.

THE DIFFERENT TYPES OF COMMON MISTAKE

It is helpful to consider the effect of a common mistake on the validity of the contract by distinguishing between different types of mistake.

Common mistake as to existence of the subject-matter

Couturier v Hastie (1856) 5 HL Cas 673

The plaintiffs shipped a cargo of 1,180 quarters of Indian corn from Salonica.

They sent the charterparty and bill of lading to the defendant in London for him to find a buyer.

The defendant arranged the sale of the cargo to the purchaser at a price of 27s per quarter, including freight and insurance, the corn expressed to be of ‘fair average quality when shipped’.

In the meantime, the vessel carrying the cargo had sailed from Salonica but put in at Tunis as the cargo of corn had become heated and had fermented. There, the master, deciding the corn was not fit to be carried further, had the corn sold.

Eight days after entering the contract of sale, the purchaser notified the plaintiffs that he was treating the contract as repudiated on the ground that the cargo did not exist at the time the contract was made.

The plaintiffs sued the defendant for the purchaser’s failure to pay the price, the defendant being a del credere agent and thus liable for the defaults of a purchaser to whom he introduced his principal.

Held: the defendant was not liable for the price.

Strickland v Turner (1852) 7 Ex 208

S bought and paid for an annuity on the life of a man who, unknown to either party, was already dead. Held: S was entitled to recover the payment made.

Galloway v Galloway (1914) 30 TLR 531

C sued D for arrears of payments due from D under a separation deed. However, the deed was declared void. The parties had entered into it on the common assumption that they were legally married. In fact, the D’s first wife was still alive.

S 6, Sale of Goods Act 1979

‘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.’

McRae v Commonwealth Disposals Commission (1951) 84 CLR 377

‘If . . . this case ought to be treated as . . . raising a question of ‘mistake’, then the Commission cannot in this case rely on any mistake as avoiding the contract, because any mistake was induced by the serious fault of their own servants, who asserted the existence of a tanker recklessly and without any reasonable ground. There was a contract, and the Commission contracted that a tanker existed in the position specified. Since there was no such tanker, there has been a breach of contract, and the plaintiffs are entitled to damages for that breach.’ (Dixon and Fullager JJ).

Common mistake as to possibility of performance

Cooper v Phibbs (1867) LR 2 HL 149

C agreed to take a lease of a fishery from P, although unknown to either party, the fishery already belonged to C. The House of Lords held that the agreement should be set aside, although P was entitled to compensation for improvements he had made to the land.

Sheikh Brothers Ltd v Ochsner [1957] AC 136

A contract relating to a plot of land provided for the buyer to deliver to the seller a certain amount of crop grown on the land each month. The land was in fact incapable of producing that quantity of crop. The Privy Council held that it was the very basis of the contract that the plot of land should be capable of producing the specified quantity of crop and that, as such, the parties’ mistake was as to a matter of fact essential to the agreement. The contract was therefore void under s 20 of the Indian Contract Act 1872.

Griffith v Brymer (1903) 19 TLR 434

The claimant agreed to hire a room to watch the coronation procession of Edward VII. An hour before the parties made their contract however, the procession had been cancelled. Wright J held that the parties had contracted on the shared assumption that nothing had happened which made performance of the contract, being one to hire a room to watch the coronation procession, impossible. As such, the contract was void.

The British Red Cross v Werry [2017] EWHC 875 (Ch)

For more than 40 years, H and D had lived together in a property (the ‘Property’). The couple never married. When H died, it was believed that he had left no will. D had no entitlement to H’s estate under the intestacy rules, the estate passing instead to various other individuals (the ‘Beneficiaries’). D brought a claim under the Inheritance (Provision for Family and Dependants) Act 1975. The Beneficiaries agreed a settlement with D under which D was given, inter alia, a life interest in the Property. The agreement was embodied in a court order in 2011 which recorded that the application of intestacy rules had not made reasonable provision for D’s maintenance.

D died some three years later and by her will she left all her property to five charities (the ‘Charities’). Subsequently, it was discovered that H had left a will, under which D was entitled to the Property absolutely. The Charities sought to appeal the 2011 court order.

The Deputy High Court Judge held that the settlement agreement was void for common mistake. It followed that the court order had approved a void agreement and had wrongly stated that reasonable provision for D had not been made. As such, it should be set aside.

Common mistake as to a quality of the subject-matter

Bell v Lever Bros [1932] AC 161

L entered into agreements with B and S under which B and S agreed to serve as directors of one of L’s subsidiary companies for a period of five years, at annual salaries of £8,000 and £6,000 respectively.

Subsequently L agreed with each of B and S for the early termination of the service agreements in consideration of compensation payments of £30,000 and £20,000 respectively.

L later discovered that during the period of their directorships B and S had both committed breaches of contract entitling L to dismiss each of them without compensation.

L sued to recover the compensation payments on the basis that the termination agreements were void for mistake.

By a bare majority, the House of Lords held that the termination contracts were valid and binding.

Lord Atkin said (at 218) that a mistake as to quality of the thing contracted for ‘will not affect assent unless it is the mistake of both parties, and is as to the existence of some quality which makes the thing without the quality essentially different from the thing as it was believed to be’.

He continued (at 223-224:


‘I have come to the conclusion that it would be wrong to decide that an agreement to terminate a definite specified contract is void if it turns out that the agreement had already been broken and could have been terminated otherwise. The contract released is the identical contract in both cases, and the party paying for release gets exactly what he bargains for. It seems immaterial that he could have got the same result in another way, or that if he had known the true facts he would not have entered into the bargain.’

Leaf v International Galleries [1950] 2 KB 86

The claimant bought a picture from the defendant which the defendant represented as being by Constable. Five years later the claimant discovered the painting was not by Constable. The Court of Appeal held that the contract was not void for mistake.

‘. . . this case is to be decided according to the well known principles applicable to the sale of goods. This was a contract for the sale of goods. There was a mistake about the quality of the subject-matter, because both parties believed the picture to be a Constable; and that mistake was in one sense essential or fundamental. But such a mistake does not avoid the contract: there was no mistake at all about the subject-matter of the sale. It was a specific picture, ‘Salisbury Cathedral.’ The parties were agreed in the same terms on the same subject-matter, and that is sufficient to make a contract . . .’

Denning LJ at 89.

Scott v Coulson [1903] 2 Ch 249

A price of £460 was paid on the sale of a policy on the life of one Death, the price being based on the surrender value of the policy. Unknown to either party, Death was dead, meaning that the policy had already matured and was worth £777.

Held: the sale contract was void.

Oscar Chess Ltd v Williams [1957] 1 WLR 370

D wanted to buy a Hillman Minx car from C on hire-purchase with his own car in part-exchange. D had bought his car from his mother. The registration book showed the car was a 1948 model and that it had changed hands 5 times between 1948 and 1954. Relying on the registration book, D described the car as a 1948 model. C accordingly valued the car at £290. Eight months later, C discovered that D’s car was a 1939 model and that its trade-in value should have been £175. C sued D for the difference between the two values. Held: the statement as to age was not a term of the contract.

‘They both believed that the car was a 1948 model, whereas it was only a 1939 one. They were both mistaken and their mistake was of fundamental importance.

The effect of such a mistake is this: It does not make the contract a nullity from the beginning, but it does in some circumstances enable the contract to be set aside in equity. If the buyer had come promptly, he might have succeeded in getting the whole transaction set aside in equity on the ground of this mistake (see Solle v Butcher), but he did not do so and it is now too late for him to do it (see Leaf v International Galleries).’

Denning LJ at 327.

Associated Japanese Bank (International) Ltd v Crédit du Nord SA [1989] 1 WLR 255

A fraudster entered into a sale and leaseback agreement relating to four machines with C. The fraudster’s obligations were guaranteed by D. When the fraudster failed to make the rental payments, C and D discovered the fraud and that the four machines did not exist. C sued D on the guarantee. Steyn J held that D was not liable under the guarantee because it was either an express or implied term that machines existed. Alternatively, Steyn J held that the guarantee was void for common mistake.

‘For both parties the guarantee of obligations under a lease with non-existent machines was essentially different from a guarantee of a lease with four machines which both parties at the time of the contract believed to exist. The guarantee is an accessory contract. The non-existence of the subject matter of the principal contract is therefore of fundamental importance.’

Steyn J at 269.

Great Peace Shipping Ltd v Tsavliris Salvage (International) Ltd [2002] EWCA Civ 1407

D entered into a contract with C for C’s vessel, the Great Peace, to escort and stand by another vessel stranded in the South Indian Ocean. Both parties believed that the two vessels were only 35 miles apart at the time the contract was made, whereas it turned out that the distance between the two was 410 miles. On discovering this, D sought a nearer vessel to assist. Two hours later, having obtained alternative assistance, D purported to cancel its contract with C and refused to make any payment. The Court of Appeal held that the contract was valid and binding.

Lord Phillips of Worth Matravers MR:


[76] ‘. . . the following elements must be present if common mistake is to avoid a contract: (i) there must be a common assumption as to the existence of a state of affairs; (ii) there must be no warranty by either party that that state of affairs exists; (iii) the non-existence of the state of affairs must not be attributable to the fault of either party; (iv) the non- existence of the state of affairs must render performance of the contract impossible; (v) 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 . . .


[94] . . . the issue in relation to common mistake turns on the question of whether the mistake as to the distance apart of the two vessels had the effect that the services that the Great Peace was in a position to provide were something essentially different from that to which the parties had agreed . . .


[162] . . . It was unquestionably a common assumption of both parties when the contract was concluded that the two vessels were in sufficiently close proximity to enable the Great Peace to carry out the service that she was engaged to perform. Was the distance between the two vessels so great as to confound that assumption and to render the contractual adventure impossible of performance?


[165] [The fact that D did not want to cancel the agreement until it knew whether it could get a nearer vessel to assist] . . . was a telling indication that the fact that the vessels were considerably further apart than the defendants had believed did not mean that the services that the Great Peace was in a position to provide were essentially different from those which the parties had envisaged when the contract was concluded. The Great Peace would arrive in time to provide several days of escort service. The defendants would have wished the contract to be performed but for the adventitious arrival on the scene of a vessel prepared to perform the same services. The fact that the vessels were further apart than both parties had appreciated did not mean that it was impossible to perform the contractual adventure.’

Green v Petfre (Gibraltar) Ltd t/a Betfred [2021] EWHC 842 (QB)

In the early hours one morning, G began playing a game on an online platform hosted by D. Some five hours later, G had winnings of around £1.7m. G tried unsuccessfully to transfer his winnings to his cash account with D. D subsequently told G that he would not be paid as there had been a glitch in the game’s software. G brought an action against D claiming that D was in breach of a promise contained in its terms and conditions allowing G to withdraw funds from his account. Foster J rejected D’s claim that its contract with G was void for common mistake.

[187]: ‘[Counsel for G] submits that in the current case it just cannot be said that the performance of the contract was rendered impossible by the alleged mistake. I agree. The contracts of gaming were performed, albeit not as profitably to Betfred as they believed they would be. Further, it cannot properly be said in my view that the state of affairs was not the fault of the provider of the gaming services, Betfred, to Mr Green. In my judgement the doctrine of mistake has no role to play in this case. As in The Great Peace, the mistake did not render the contract incapable of performance, just less advantageous to one party.’

IS THERE A SEPARATE DOCTRINE OF COMMON MISTAKE IN EQUITY?

There is Court of Appeal authority to the effect that a contract which is valid at law might nevertheless be set aside in equity. In other words, a contract which is not void for common mistake might be voidable. But in a more recent case, the Court of Appeal has held, somewhat controversially, that there is no such equitable jurisdiction.

Solle v Butcher [1950] 1 KB 671

B made various alterations to a flat which he then let to S for seven years at an annual rent of £250, both parties mistakenly believing that the flat was a ‘new’ dwelling and not subject to a controlled rent of £140 per annum. B would have been able to charge the higher rent had he complied with various formalities, but, under the influence of the mistake, he failed to do so. S sought a declaration that the rent was restricted to £140 and an order for repayment of rent overpaid. The Court of Appeal held by a majority that the tenancy should be set aside on terms giving the tenant the option to claim a new lease at the higher rent.

‘[I]t is necessary to remember that mistake is of two kinds: first, mistake which renders the contract void, that is, a nullity from the beginning, which is the kind of mistake dealt with by the courts of common law, and secondly, mistake which renders the contract not void, but voidable, that is, liable to be set aside on such terms as the court thinks fit, which is the kind of mistake dealt with by the courts of equity. . .

A contract is . . . liable in equity to be set aside if the parties were under a common misapprehension either as to facts or as to their relative and respective rights, provided that the misapprehension was fundamental and that the party seeking to set it aside was not himself at fault.’

Denning LJ.

Great Peace Shipping Ltd v Tsavliris Salvage (International) Ltd [2002] EWCA Civ 1407

‘Our conclusion is that it is impossible to reconcile Solle v Butcher with Bell v Lever Bros Ltd. The jurisdiction asserted in the former case has not developed. It has been a fertile source of academic debate, but in practice it has given rise to a handful of cases that have merely emphasised the confusion of this area of our jurisprudence . . . If coherence is to be restored to this area of our law, it can only be by declaring that there is no jurisdiction to grant rescission of a contract on the ground of common mistake where that contract is valid and enforceable on ordinary principles of contract law.’

Lord Phillips MR at [157].

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