Topic 8 - Mistake.docx

Topic 8 – Mistake Mistake is a difficult area of contract law. A major reason for the difficulty is that the common law recognises no comprehensive theory of mistake. Consequently, many of the decisions are difficult to reconcile with each other. This difficulty is made worse by the fact that the nu...

Topic 8 – Mistake Mistake is a difficult area of contract law. A major reason for the difficulty is that the common law recognises no comprehensive theory of mistake. Consequently, many of the decisions are difficult to reconcile with each other. This difficulty is made worse by the fact that the number of mistake cases is quite small. A further complication is that judges, authors and lawyers often use different terms to describe the same concept (and at other times use the same term to describe different concepts). Consequently, accounts of this area of law are often structured in very different ways giving the impression that different authors have a different view of the underlying law. This is usually a misimpression that arises from a different scheme of organisation and presentation. The same point may be made about the topic of Illegality considered in Topic 12. For this reason it is recommended that you do not read a second textbook account of these subjects if you are happy that you have understood the first account that you have read. (Mini Lecture 1) Mistake comes with a second warning, which is this, when you read an account of this topic, I would stick to one account. If you see something you don't follow, try to resolve it without looking it up in another book. The reason I suggest this is that of all the topics in the law of a contract, different textbook writers structure the topic differently and they use different labels for different types of mistake. It can be quite confusing if you start looking at different accounts and try to work out that if someone is referring to a mistake with a particular label another writer might be using the same label elsewhere. I would stick to one account and look carefully at the definitions that are being used on what kind of mistake is meant. More particularly what we're going to do in this lecture, which will be slightly longer than some of the other many lectures, is we're going to understand three different types of mistake. Before we do that, we are going to look at the difference between mistake and frustration. What this is, is a question of timing. The doctrine of frustration is something that we haven't studied yet, but if we take a straightforward example of a property that I am selling to you, let us suppose that we contract to sell the property at midday but unknown to me as the seller, the property suffered a fire and burned down that very morning. If we compare that to case where you contract to use, let's say a conference center for a conference and after the date of contracting but before the time the conference is due to be held, the conference center burns down. In my two examples, there is a physical destruction of the subject matter of the contract, the house being sold in the first and the conference center being hired in the second, but the timing is different. In the first case, the sale of the house, the physical destruction of the subject matter takes place before the time of contracting. In the second example, the physical destruction of the subject matter of the contract takes place after the moment of contracting but before performance is due. This timing is the difference between mistake and frustration, where a common misapprehension is present at the time of contracting, then the contract may be set aside for common mistake, my house example, but where events have occurred after the parties have entered the contract, it is the doctrine of frustration which may apply. When looking at a factual scenario, it is important to work out whether the event, the legal significance of which you are trying to assess takes place before or after the moment of contracting. We're going to talk about three different types of mistake. The first type of mistake is a cross purposes mistake, the second, a unilateral mistake. We'll spend most of our time talking about the third type of mistake, a common mistake. Let's start to mention quickly the first two types. The cross purposes mistake is where one party means one thing and the other another thing. In the case of Raffles v Wichelhaus, a contract was entered in relation to cargo on a ship called the Peerless, said to be sailing from Bombay, but there were two ships with that name sailing from Bombay. One party meant one ship, the other meant the other. We resolve such cross purposes Page 2 of 4 mistakes by applying a reasonable person test. What would a reasonable person interpret the contract as? If that reasonable person's perspective cannot resolve it, then we say no contract is entered. A unilateral mistake is a situation where one party is mistaken and the other is aware of it. An example of this comes within a doctrine called snapping up, where a seller offers for sale a good at undervalue, mistakenly undervaluing it, and the purchaser, as purchasers do, snap up that offer. It's said that you cannot snap up an offer which you know to be mistaken as to its terms. It's a unilateral mistake because a mistake is made by the seller and it is one which the buyer is aware of. There's another category of unilateral mistake, this mistake where one party makes a mistake and the other is aware of it. That is cases of mistake as to identity because there's a series of cases where one party represents themselves to be someone they aren't, maybe someone more creditworthy, and the other party contracts with them on that basis. The purchaser is making a mistake and the seller is aware of the mistake. Indeed, it was the seller, the fraudster's very scam, if you like, to induce that mistake. Now, I'm not going to go into detail about mistakes as to identity. This is something that I'm going to leave you to do some reading on yourself. There's extra guidance in the reading on mistakes as to identity. Other lectures have touched on these mistakes and the reason we've touched on them already is that both the cross purposes mistake and the unilateral mistake are both mistakes that go to agreement. When parties were cross purposes, is there a contract? Are the parties agreed? In unilateral mistakes, we're saying is there an agreement we can identify? This is very different to the next category of mistake, which we call a common mistake because both parties in a common mistake make the same mistake. They are perfectly agreed. The law doesn't have to work out what the agreement is between them. They all have agreed, but as in the example I started the lectures with, when we sold my house and unknown to either of us, it had burned down before we contracted for its sale. We're in perfect agreement about what we're selling, the house, but the question is whether the mistake that we share, we both think it's in existence at the time of contracting, whether that has an effect upon our contract. Common mistake in the sense of shared mistake is different to the other categories of mistake, I've mentioned, because it does not involve a question of is there an agreement? It involves the question, what is the effect upon the agreement there is of a shared misapprehension. That shared misapprehension may be of different kinds. The example I gave of the house is a case about the non-existence of the subject matter of the contract. We both thought the house was in existence when it was not. In an old case court Courturier v Hastie, it concerned the sale of a cargo of corn on route for England, which unknown to both parties at the time of sale had fermented in the heat and been sold off at an intermediary port. The cargo being sold was no longer in existence at the moment of contracting. The action was effectively won by the seller seeking payment for the price of the goods and that action failed. It was said from that case, one interpretation of it, is whenever there is a common shared mistake as to the non-existence of the subject matter of the contract, the contract is void. No contract comes into existence and that is the reason the seller's action for the price failed. In the case of McRae v Commonwealth Disposals Commission, a different interpretation was put upon the case of Courturier by the High Court of Australia. This case involves the sale by the Commonwealth Disposals Commission of the right to salvage a wreck. There was a common mistake because both parties thought that a wreck existed at the particular location given which could be salvaged. In fact, there was no wreck at the map reference given by the Commonwealth Disposals Commission. The buyer, in this case, sued for damages. Now if Courturier v Hastie established a proposition where there was a common mistake as to the existence of the subject matter of the contract, the contract was void, then the buyer could not sue. It would not succeed because a void contract is a contract which never comes into existence. You'll recall that from the mini-lecture on minors contracts, but the High Court of Australia said, "No, that was not the proposition established by Courturier v Hastie because, in Courturier v Hastie, they said there was a sale of goods guaranteed by the seller to exist. If they did not exist, it followed inevitably that the seller, having guaranteed they exist, could not sue for the price. If it was a sale of goods guaranteed to exist by the seller, it did not follow that the buyer could not sue for damages for the failure to deliver the goods. In McRae, that was what was brought. Now, this is complicated because the misunderstanding of what was decided in Courturier v Hastie, the misunderstanding that says that all contracts where there's a common mistake as to the non-existence of the subject matter of the contract are void, found its way into statute, first, in 1893 Sale of Goods Act, and then in the codification of the original Sale of Goods Act in the 1979 Sale of Goods Act because Section 6 says that 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. This is as complicated a piece of law as we will encounter in this course but you will notice that the Sale of Goods Act refers to goods that were once in existence and subsequently perished. It does not refer to goods such as McRae, which were never in existence. The picture we have is this. Whenever it was a shared mistake as to the non-existence of the subject matter of the contract and the goods were goods which once existed but subsequently ceased to exist, then the contract is void under Section 6. If we have goods which simply never existed where there was a common mistake as to the existence of the subject matter of the contract, it all depends upon the proper interpretation of the contract. If the seller guaranteed the goods to exist, as in Courturier v Hastie, a seller cannot sue for the price of those goods. If the buyer sues for damages for non-delivery in respect of goods which the seller guaranteed exist, then that buyer may succeed as in McRae v Commonwealth Disposals Commission. The second category of common or shared mistake is where the mistake is not as to the existence of the subject matter of the contract but rather is as to some quality which those goods are said to have. Now, there are simple examples. Both parties think that the painting being sold is by Picasso. The law was stated in a case called Bell v Lever Brothers on slightly more complex facts. The chairman or vice chairman of Lever Brothers gave exceptional services, they were very successful in what they did but they also breached contracts of employment by dealing in shares in such a way that those contracts could have been terminated by Lever Brothers. Lever Brothers and, though it sounds unbelievable, the chairman or vice chairman themselves were not aware of this. Termination contracts were entered between Lever Brothers and the chairman or vice chairman and these contracts shared a common mistake as to quality. The reason they shared a common mistake as to quality is that the subject matter of the termination contracts was the underlying contracts. Those underlying contracts had a quality, in relation to the underlying contracts, there was a shared mistake because both parties thought that those contracts, the underlying contracts of employment were unimpeachable, i.e. were not terminable, whereas, in fact, they were terminable, a not rather convoluted account the cases about common mistakes as to quality. The case establishes the proposition that where the common or shared mistake as to quality is as to a very fundamental thing, then it can render the contract void. That was the proposition which the House of Lords supported. The difficulty we have is knowing what mistake as to quality is sufficiently fundamental to render such a contract void. It didn't matter as much in the past because, in addition to the common law rules on void contracts, there used to be an equitable power to set aside a contract on terms. What do we mean here? Well, if the mistake as to quality was not sufficiently fundamental to render the contract void a common law, equity had the power to set aside the contract. The contract was said to be voidable in equity for mistake as to quality and this category of mistake was a bigger category than the mistakes which were so fundamental as to render void a common law. In a case called Great Peace Shipping v Tsavliris, it was decided that there was no power in equity to set aside contracts for mistakes as to quality. It's either valid, the common law, or not. This takes away from the court a very valuable power because, in one of the old cases, there was a contract to sell a house, it was believed that the house being sold had a tenant who had a right to live there when, in fact, they did not. The house was being sold at much less than its real value because with vacant occupation, no tenant, it was worth more. In the old case, the court was able to say, "There was a mistake as to quality. We will set aside the contract, but we will do it on terms because it's offsetting, as the court setting aside the contract it can be done on terms. The terms that we impose are that the seller has to offer in the first instance the house for sale at its full market value to this purchaser but there is now no equitable power to set aside the contract on terms. There are other categories of mistake discussed in the textbook in the module guide but I've tried to give you a flavor of the main types of mistake and I've had to include more detail, hence, a slightly longer lecture here in this topic so that you understand the more difficult aspects of the topic. The extra reading is there. I've picked out for you the discussion of cross purposes mistake, the discussion of shared mistake in McKendrick but I've given more detail, as I said, in relation to the type of mistake that I simply haven't had time to cover, mistake as to identity, which is a selfcontained topic which you can find there. 8.1 Some guidelines on mistake A few guidelines may assist you as you approach this topic. Mistakes can be either unilateral (a mistake of one party only) or bilateral (a mistake of both parties). In general, the law will only provide relief where the mistake is a bilateral mistake – although there are some important exceptions to this point. The parties may share the same bilateral mistake (it is a ‘common’ or ‘mutual’ mistake) or they may each be mistaken, but with respect to a different point. At common law, an operative mistake will render a contract void. In equity, the effect of mistake may be to render the contract voidable. The distinction bears repeating at this point. A void contract is, of course, one that never comes into existence. A voidable contract is one that comes into existence but is subsequently liable to be set aside. Equity seeks to provide whatever remedy is just in the circumstances. Mistake in equity rendering a contract voidable is, however, doubted in English law at present. Many cases can be explained upon different grounds than that of mistake. Courts are reluctant to find an operative mistake. A possible reason for this is that to do so does, to a certain extent, rewrite the contract between the parties. Another possible reason is that if a court finds that a contract is void for mistake, this may well affect the rights of innocent third parties. Many mistake cases will present the same fact patterns as misrepresentation cases – indeed, in the majority of cases, a claimant would be advised to claim that a misrepresentation had been made rather than a mistake. This is partly because of the availability of damages for a misrepresentation, but also because the changes effected by the Misrepresentation Act 1967 make a misrepresentation easier to prove. (See Topic 9.) This overlap has clear consequences for how problem answers should be structured. When you have studied this topic you will see that the English law of contract has a narrow doctrine of mistake. However, the overlap with misrepresentation is significant here. The ungenerous approach to relief that follows from a narrow doctrine of mistake is mitigated by a comparatively broad, and so generous to relief, doctrine of misrepresentation. 8.1.1 Mistake at common law and in equity It may assist you to think about mistake in different categories. The most significant division is between mistake at common law and mistake in equity. We will begin with mistake at common law, because if the mistake is an operative one, the contract is void – and so there is no need to consider mistake in equity. We will also begin with bilateral mistakes and consider different types of bilateral mistakes – that is to say, the circumstances in which courts will find that a mistake of both parties is sufficiently fundamental to invalidate the apparent contract. In these cases, if the mistake is operative it is said to result in what is best described as a paradox: a void contract. Because of the mistake, the apparent agreement of the parties lacks consensus and there is no (nor ever was any) contract. 8.1.2 Mistakes of law and mistakes of fact English contract law long barred relief where the mistake was one of law rather than of fact. Exceptions existed to this bar – a common one was that a mistake as to private rights was not a mistake of fact (e.g. Cooper v Phibbs  LR 2 HL 149). In Kleinwort Benson Ltd v Lincoln City Council  2 AC 349 the House of Lords allowed recovery of a mistaken payment where the mistake was one of law. In Brennan v Bolt Burdon  1 WLR 1240 the Court of Appeal applied this decision and held that the contractual compromise of a legal claim could be void as a result of a common mistake of law. It was a question of construction as to whether or not the mistake made the compromise impossible (Great Peace Shipping Ltd v Tsavliris Salvage Ltd (The Great Peace) 4 All ER 689). Where there was a doubt as to the law concerned, there was no mistake of law sufficient to render the contract void. 8.2 Bilateral mistakes There are two basic types of bilateral mistakes. In the first case, each of the parties is mistaken, but they do not share their mistake. In the second case, the parties share their mistake. 8.2.1 Absence of genuine agreement In situations where there is an absence of genuine agreement, the parties are each mistaken, but they do not share a mistake. Their separate mistakes are sufficiently fundamental, however, that no contract can be created. It is sometimes said that the parties are at ‘cross purposes’ and that the offer and acceptance do not correspond. No contract can arise because there is an absence of agreement. A contract cannot be formed in these circumstances because, on an objective interpretation, it cannot be said what was intended by the parties. Another description of this process is that the mistake ‘negatives’ the consent of the parties to contract. They have, in other words, failed to create an agreement. The leading case is Raffles v Wichelhaus  2 H&C 906. Here, one party bought, and the other party sold, cotton to be shipped on the vessel Peerless from Bombay. Unknown to either party, there were two ships Peerless and each intended a different ship. The court found that there was no contract. See also Scriven Bros & Co v Hindley & Co  3 KB 564 (see also Section 2.1.1). Study task 1 Suppose the buyers in Scriven v Hindley had been suing for damages for non-delivery of hemp. Would the contract still have been held to be void? Show feedback You must examine the underlying rationale for the decision in order to answer this question. In this case, the trial judge stated that ‘a contract cannot arise when the person seeking to enforce it has by his own negligence or by that of those for whom he is responsible caused, or contributed to cause, the mistake’. In the circumstances of Scriven, the seller was said to have contributed to the cause of the mistake. If the buyers had not contributed to the mistake, the contract would not be void and they should recover damages for non-delivery on the basis of the contract. See also the discussion in Section 2.1.1. Summary The parties are said to be at ‘cross purposes’ when the offer and acceptance do not correspond. In these circumstances, no contract can arise. 8.2.2 Common mistake Common mistake (sometimes, confusingly, referred to as mutual mistake) occurs where both parties to a contract make the same mistake about a critical element of their agreement. The leading case dealing with mistake, and this type of mistake in particular, is Bell v Lever Brothers  1 KB 557. In this case, Lord Atkin stated that when mistake operates upon a contract, it does so to negative or nullify the consent of the parties. Common mistake deals with those situations where an apparent contract lacks consent and consequently the contract is void ab initio (void from the outset). Because English law has yet to work out any comprehensive theory of mistake, it is best to approach the subject by examining different situations where courts have found that there was no contract. You should keep in mind as you examine these cases that many of them can also be rationalised on grounds other than mistake. 8.2.3 Non-existence of the subject matter In some situations, parties may reach an agreement to deal with a subject matter which, unknown to either party, does not exist. These cases deal with the problem of res extincta. Note that in these cases, the contract suffers from an initial impossibility; from the outset it cannot be performed. An example of such a situation is where A, the seller, contracts to sell his horse to B, the buyer. Without A or B’s knowledge, at the time the contract is entered into the horse is dead. It is, therefore, impossible for A to sell B his horse. In the leading case, Couturier v Hastie  UKHL J3, the seller ‘sold’ a cargo of corn to the buyer. Neither party was aware of the fact that, at the time of the ‘sale’ the captain of the ship carrying the corn had sold the corn. This case has been taken to stand for the proposition that in a contract for the sale of goods, where the goods have perished without the seller’s knowledge, the contract is void – s.6 of the Sale of Goods Act 1979. You will note that in Couturier v Hastie the House of Lords did not call the contract void nor did they consider what the position would have been if the buyer had claimed damages for non-delivery. However, this understanding of the case was at least partially incorporated into the 1893 (see now 1979) Sale of Goods Act, s.6, which expressly provides that in a contract for the sale of goods, where the goods have perished without the seller’s knowledge, the contract is void. It should be noted here that s.6 applies to goods that have ‘perished’ (i.e. to goods that once existed and subsequently ceased to exist). It will not apply to goods which the parties mistakenly thought existed but which, in fact, never existed. It is, however, possible to interpret Couturier v Hastie differently and this is what the High Court of Australia did in McRae v Commonwealth Disposals Commission  84 CLR 377. The High Court of Australia expressed doubt that Couturier v Hastie involved issues of mistake and that, properly understood, the case was about the proper construction of the contract entered. In McRae the claimants sent a ship to salvage the wreck of a tanker which they had purchased from the defendants. In fact no such tanker existed at the location given and the case proceeds on the basis that neither party was aware of this mistake. The claimant succeeded in their action for breach of contract. The contract was analysed as one for goods that were guaranteed to exist. An alternative construction would have been that the contract was one for the sale of the wreck if it existed at that location. If this construction had been taken then the claimant’s action for breach of contract would have failed. The subject matter of the contract would then have been a ‘chance’ (sometimes called an ‘adventure’). It may seem odd that a party would purchase such a chance but that in essence is what the purchase of a lottery ticket is, the purchase of a chance of winning. If this had been the construction applied in McRae, the claimant would have no more valid claim for breach of contract than would the purchaser of a lottery ticket who demanded the price back after the draw because the ticket did not win! The result and approach in McRae seems correct. Put slightly differently, the result depends upon which party under the terms of the contract is allocated the risk that the goods may not exist. In McRae this risk was assumed by the seller who guaranteed the goods’ existence and so became liable when they did not exist. This approach was approved by the Court of Appeal in The Great Peace (2002), However, if s.6 of the Sale of Goods Act 1979 applies, the court is prevented from taking account of the construction of the contract; the section simply states that the contract is void. The law in this area is therefore untidy with different principles applying when there is a shared mistake as to the existence of the subject matter of the contract where: goods which once existed have subsequently perished (contract is void according to s.6 and so no action may be brought) and goods which never existed (an action may be maintained depending on the proper construction of the contract: McRae). Summary Where the subject matter of the contract does not exist at the time of the contract, courts must find that the contract is void where s.6 of the Sale of Goods Act applies. In cases falling outside s.6, whether a party may sue for breach of contract will depend upon the proper construction of that contract. 8.2.4 Mistakes as to ownership Like the situation of the non-existent subject matter, these cases involve a situation of initial impossibility. One party agrees to sell and the other party agrees to buy something which, unknown to either of them, is already owned by the buyer. This is described as the sale of a res sua. The agreement cannot be performed because it is impossible to transfer the ownership since the ‘buyer’ already owns the thing. See Cooper v Phibbs (1867) as explained by the Court of Appeal in The Great Peace (2002). Study task 2 If the seller of a good which had never existed warranted that it did exist, would the contract of sale be void? Show feedback If the seller warranted that the good existed, then the warranty forms a part of the contract of sale (or a separate, collateral contract). In this case, the seller has assumed the risk that the good exists. If it does not, the seller is in breach of contract. This is one explanation of McRae v Commonwealth Disposals Commission (1951) (i.e. the Commission had warranted the existence of the vessel to be salvaged). Since it did not exist, the Commission had breached their contract. Study task 3 Is it possible to regard Couturier v Hastie as a case where the seller provided no consideration? Show feedback Yes, it is possible to regard Couturier v Hastie (1856) as a case where the seller provided no consideration. A strong argument is made by the High Court of Australia in McRae v Commonwealth Disposals Commission (1951) to this effect. The High Court states that the question of mistake as to the supposed existence of the subject matter of the contract never arose in Couturier v Hastie. This was only a subsequent and incorrect interpretation of the case; which, unfortunately, was codified in the Sale of Goods Act 1893. The real ground for the decision is that there was a failure of consideration and the purchaser was not bound to pay the purchase price. The purchaser would receive nothing in exchange for the purchase price. Had he paid the purchase price, he could have sued for the recovery of the money on the ground that this was money he had received. The High Court also stated that such an interpretation is supported by the observations of Lord Atkin in Bell v Lever Bros Ltd (1931). What is of central importance is the construction of the contract. If the vendor had warranted or promised that the goods were in existence at the time of the contract, then the vendor would be in breach of contract if they were not. This was a risk that the vendor had assumed. Study task 4 To what extent, if any, can cases such as Cooper v Phibbs be understood as cases where there is a defective consent to the contract? Show feedback It is possible to view these as cases where the putative purchaser did not actually consent to the contract. The consent was defective in that it was based upon a mistaken assumption – that the purchaser needed to contract to acquire the right in question. However, it is also possible to see these as cases of impossibility – in which case, how would the consent of the parties be relevant? These are cases of initial impossibility because it is never possible for an owner to purchase that which he already owns. The result in the case may be explained on either basis. For a further explanation see Section 8.2.5. 8.2.5 Mistake as to the possibility of performance In some circumstances the parties may be mistaken as to the possibility of performance. The parties have a shared misapprehension that performance of their agreement is possible – in fact it is not. Professor Treitel divides these cases into three categories. Cases of physical impossibility – see Sheikh Brothers Ltd v Ochsner  UKPC Cases of legal impossibility – see Cooper v Phibbs (1867). Cases of commercial impossibility – see Griffith v Brymer  19 TLR 434. Note that it is important, in cases where it is alleged that there is a mistake as to the possibility of performance, to ascertain from the agreement whether one party has assumed the risk of performance. If one party has assumed this risk, the party will probably be in breach of a (valid) contract. We will return to the concept of impossibility when we consider frustration in Topic 13 of the module guide. As we will see, a contract is frustrated if performance becomes impossible because of a supervening (or later) event Study task 5 Outline the circumstances in which courts have found that performance is impossible. Show feedback The most common instance of this form of impossibility is in the case of a res sua – where one party attempts to purchase that which he already owns. The case of Cooper v Phibbs is usually given as support for this proposition. Another instance occurs when the parties contract on the basis that something will be done – when in fact, that something is incapable of performance. See, for example, Sheikh Brothers v Ochsner. Yet another instance can be found in the situation where the commercial purpose of the contract can no longer be fulfilled – see Griffith v Brymer. Study task 6 In Griffith v Brymer, is performance of the contract impossible or is performance of the contract radically different from that which was contemplated by the parties? Show feedback On the one hand, performance of the contract is still possible – the hirer could still take the room on the appointed day. On the other hand, the entire purpose of the contract was for the hirer to hire a room with a view (of the coronation procession). Once the possibility of this view has gone, the commercial possibility of the contract has also disappeared. The case can be compared to Herne Bay Steamboat Co v Hutton (1903). Here the Court found that some of the commercial possibilities of the contract remained and it had not been frustrated. Summary It is possible to regard the situations where the subject matter does not exist, or the thing is already owned by the ‘purchaser’ or situations of physical/legal/commercial impossibilities as instances where the contract is void or invalidated because it cannot be performed. It is important to note, however, that the apparent contract is only void where the mistake is of both parties. 8.2.6 Mistake as to a quality of the subject matter This is a very difficult area of the law of mistake. The difficulty arises from the House of Lords’ decision in Bell v Lever Brothers Ltd  1 KB 557. The case presented hard facts to the court. The chairman and vice-chairman of a Lever Brothers’ subsidiary rendered exceptional services to the company but also breached their contracts of employment in such a way that the contracts were terminable at Lever Brothers’ option. Lever Brothers, unaware of this, entered into termination contracts to end the employment of the two men because Lever Brothers were amalgamating the subsidiary with another company. When Lever Brothers later learned that the employment contracts were terminable because of the behaviour of the two men they attempted to set aside the termination contracts and recover the money paid. The mistake was a bilateral mistake as to a quality of the subject matter of the contract. The subject matter of the termination contract was the employment contract and the particular quality was the terminability of the employment contract at Lever Brothers’ option. Because of their breaches of duty, Lever Brothers could have terminated the contracts of the two men without compensation. The jury found that they would have terminated the contracts without compensation and would never have entered into the termination contracts had they known of the secret trades. The House of Lords was divided 3–2 in favour of finding that the severance contracts were valid. Lord Atkin wrote the leading judgment. In it, he recognises that a mistake as to quality may render the contract void: Mistake as to quality of the thing contracted for raises more difficult questions. In such a case mistake will not affect assent unless it is the mistake of both parties, and is to the existence of some quality which makes the thing without the quality essentially different from the thing as it was believed to be. Lord Atkin then applied this test to the facts before him and found that the mistake in Bell’s case was not sufficient to render the contract void. The problem the case creates is that if the mistake was not sufficient in this case, it almost never would be. It is probably for this reason that there have been so few successful mistake cases in later years. This was recently illustrated in Triple Seven MSN 27251 v Azman Air Services  EWHC 1348 (Comm) where the court found that two aircraft leases were not void for common mistake when both parties understood that the planes were to be used to support religious pilgrimages but neither realised that permission for such use had already been denied. The High Court effectively held that the mistaken assumption was not sufficiently fundamental to render the leases void. In the case of Associated Japanese Bank (International) Ltd v Credit du Nord SA  3 All ER 902 Steyn J (as he then was) explained the meaning and application of Bell v Lever Bros  AC 161. This is an important case because it provides a comprehensive assessment of contractual mistake. Steyn J discussed Bell v Lever Bros in some detail because of the controversy surrounding the application of the case. He stated that the doctrine of mistake at common law had a narrow ambit – and one into which few cases had fallen. To an extent which has yet to be determined, this case is affected by the decision in The Great Peace (discussed below and in greater detail in Section 8.4 ‘Mistake in equity’). In The Great Peace, the Court of Appeal referred to Bell v Lever Bros with approval, although Lord Phillips MR noted the cases which Lord Atkin relied upon as support for his principles provided ‘an insubstantial basis for his formulation of the test of common mistake in relation to the quality of the subject matter of a contract’. Lord Phillips MR, in The Great Peace, appears to have made the relevant criteria for an operative mistake as to quality even more demanding than those proposed by Lord Atkin in Bell v Lever Bros. Study task 7 Summarise the approach provided by Steyn J in Associated Japanese Bank (International) Ltd v Credit du Nord SA as to how cases where mistake is alleged should be resolved. Show feedback Steyn J (as he then was) recommended the following approach to cases of common mistake. It must be determined whether the contract, by express or implied condition, provides who bears the risk of the relevant mistake for only when the contract is silent on this point can mistake as a legal doctrine be considered. Where common law mistake has been pleaded, the court must then consider this claim and if the contract is found to be void, mistake in equity cannot be considered. If the contract is valid at law, it may still have to be considered as to whether or not there is a mistake in equity. (Note You should note the effect of The Great Peace on this last point because Lord Phillips MR found that there was no such separate equitable doctrine of common mistake.) With this approach in place, Steyn J then set out the following propositions. It is imperative that the law ought to uphold rather than destroy apparent contracts. Common law rules on mistake are designed to cope with the impact of sudden and unexpected circumstances upon apparent contracts. For a mistake to attract legal consequences it must be substantially shared by both parties at the time the contract is made. The mistake must render the subject matter of the contract essentially and radically different from the subject matter which the parties believed to exist. A party cannot be allowed to rely on a common mistake where the mistake consists of a belief which is entertained by him without any reasonable grounds for such belief. Write a definition of the term ’res extincta’. Self-assessment questions Compare your definition of ‘res extincta’ with that of ‘consideration’. In what circumstances did Lord Atkin say that consent would be negatived? In what circumstances did he say it would be nullified? What are the differences between these two? Summary Mistake as to a quality of the subject matter creates great difficulties in the common law of contract. Very few contracts are found to be void on the ground that there is a sufficiently fundamental mistake as to quality. It is the element of ‘sufficiently fundamental’ that proves so troublesome. This is partly because of the decisions in Bell v Lever Bros and The Great Peace and partly because it is difficult to distinguish a sufficiently fundamental quality from the assumption of a risk which worked to the disadvantage of one or both of the parties. It is because of these difficulties that courts created an equitable device to circumvent the difficulties posed by mistake at law. This device, and especially its reduced scope after The Great Peace, is discussed in Section 8.4. 8.3 Unilateral mistakes Courts are generally unwilling to find that a contract is void at law where the mistake is the mistake of one party only. To find the contract void would, in most instances, prejudice the non-mistaken party. Accordingly, courts will generally only find the contract void in one of two situations. In the first case, the non-mistaken party is aware of the other party’s mistake and proceeds to contract anyway. In the second case, the non-mistaken party has created the mistake to induce the (now) mistaken party to contract. The largest group of these cases are those of ‘mistaken identity’. In both of these instances, the non-mistaken party does not have any reasonable expectations to protect. In the first instance, he is aware of the mistaken assumption or promise and acts to take advantage of it. In the second instance, he has deliberately caused the mistake as to identity to form a ‘contract’ between himself and the mistaken party. In neither situation has he a reasonable expectation that the court will seek to protect. Indeed, the entire mistake has come about by reason of his inaction or by his fraud. As you consider this area, be aware of the fact that there are many cases where the contract is valid at law and yet equity may provide some relief to the mistaken party. 8.3.1 Mistaken assumptions or promises In some circumstances, mistake is said to negative the consent of the mistaken party so that no contract arises. The mistake prevents the contract from arising. Importantly, the non-mistaken party must be aware of the other party’s mistake. The perplexing case of Smith v Hughes  LR 6 QB 597 illustrates this proposition. The claimant sold the defendant oats after showing him a sample of the oats. The defendant mistakenly thought he was buying old oats; in fact, they were new oats. The claimant had done nothing to induce this mistake and was unaware of it. The Court held that for a mistaken assumption or promise of one party to be sufficient to vitiate a contract (to render it void) the mistake must be known to the other party and it must be a mistake as to what is promised. Thus, in Smith v Hughes, the contract would have been void only if two factors were present. First, if the defendant had been mistaken as to the promise made to him by the claimant. In this case the promise would have been as to the age of the oats. Second, that the defendant knew about the claimant’s mistake as to the nature of the promise made to him by the defendant (sometimes described as a mistake as to terms). As you will see in your readings, while the law appears to require a subjective intention in these cases (that is to say, what is actually in the minds of these parties), it is in fact taking an objective approach (that is to say, what would be in the minds of reasonable parties in these circumstances). Where the mistake is as to an assumption or as to a promise, courts rarely find that the mistake is operative – that is to say, that, because of the mistake, no contract has been created. The entire area displays the extent to which the common law of contract is rooted upon the principle of caveat emptor (let the buyer beware). As long as one party does not misrepresent a state of affairs or defraud the other party, courts will generally find the consensus, the agreement, between the parties which is necessary to form a contract. Indeed, courts will be very reluctant to disrupt an apparent contract in these circumstances, for to do so would be to write the contract for the parties. In some instances, however, it is so readily apparent to the one party that the other is proceeding upon a mistaken basis that the court will find that the apparent contract is void. These are cases where one party ‘snaps’ at the obviously mistaken offer of another. A always sells B grain at a price of x per pound. One day, A offers to sell B grain at x per ton. B, realising that A has made a mistake, snaps at A’s offer and ‘accepts’ immediately. This is a case where the mistake is operative – the mistake negatives A’s consent in such a way that there is no contract. Note that: (i) B is aware of A’s mistake and (ii) B’s conduct is such that it is unconscionable or inequitable for him to hold A to a contract. The cases of Hartog v Colin and Shields  3 All ER 566 and Centrovincial Estates plc v Merchant Investors Assurance Co Ltd  Com LR 158 illustrate this proposition and were discussed earlier in Section 2.1.1. Summary This is not an easy area to understand. The mistake of one party is generally not enough to avoid the contract. The mistake must be known to the other party. For the contract to be void, it is not sufficient that the promisor realises that the promisee is mistaken as to an important element of the contract. The promisor must realise that the promisee is mistaken and that he is mistaken as to the promise made by the promisor. It may be that this oddity arises because of the nature of the contract in Smith v Hughes – where the sale of the oats was made by sample. The defendant had examined a sample of the oats when he placed the order. In the circumstances, the only reason that the contract would be void was if the promisor’s conduct verged on the fraudulent – in not explaining to the promisee that he was mistaken about the promise. Courts will usually allow the contract to be avoided for a unilateral mistake in circumstances where the behaviour of the non-mistaken party is such as to indicate that he has no reasonable expectation to protect. Where the non-mistaken party’s actions are such as to indicate that he seeks to take advantage of the mistaken party, there is no reasonable expectation to protect. In other words, a non-mistaken party who ‘snaps’ at the mistaken offer of another will not reasonably have thought the mistaken offer was a legitimate one. Study task 8 Ace Sportscards hires a new assistant, Blob. Blob places various cards in the shop window and places prices below the cards. He knows nothing about sports cards and places the wrong price tag below some cards. He prices a 1979 Wayne Gretzky rookie card at $5 – the card is worth $500. Crafty, passing the shop, notices the card and enters the shop. He offers Blob $20 for the card; Blob notes the price below it and sells the card to him for $5. Blob later realises his error; Ace Sportscards ask you if there is a contract with Crafty. Show feedback You need to approach this question by asking yourself if there is a contract between Ace and Crafty (Blob acts as an employee of Ace). Ace alone, through Blob, operates under a mistake. There is nothing in the problem to indicate that Crafty is mistaken about the worth of the card. If Crafty is also mistaken as to the card, then the parties share a common mistake as to a quality of the subject matter of the contract and the House of Lords’ decision in Bell v Lever Bros Ltd (1931) applies. On the prevailing interpretation of Bell, that means that it is unlikely that the court will find that the contract is void. However, if only Ace is mistaken, the contract is likely to be set aside as void. This is because Crafty is aware of Ace’s mistake and he ‘snaps’ at the offer. His conduct is unconscionable or inequitable in the sense that he enters the shop solely to take advantage of what he knows is a mistaken offer. Hartog v Colin and Shields (1939) applies to this case – there the price had always been negotiated per piece and not per pound (which resulted in a lower overall cost). What Crafty will argue in this case is that there have been no prior dealings between the parties in this instance – Ace will need to establish that the price of $20 is so inconsistent with the price offered in the trade that Crafty has indeed ‘snapped’ at the mistaken offer. (You should be aware of the possibility, without exploring it in any depth, that s.20 of the Consumer Protection Act makes it an offence for a person acting in the course of business to give a misleading indication as to price to consumers.) Study task 9 A and B are art collectors. A has a picture that may be an Emily Carr. A offers to sell it to B. Consider the following problems. Distinguish between them and note whether, in any or all of them, a contract arises. A says to B: ‘It’s a Carr all right’, whereupon B buys the picture. It is not a Carr. A (mistakenly) believes the painting to be a Carr and tells B that it is a Carr whereupon B purchases it for £500,000. A thinks it is a ‘school of Carr’ picture, but B thinks it is an original. Same as (c) but A knows B thinks it is an original. B thinks A is warranting the picture as original. A knows this, and has no intention of warranting it. Show feedback In a situation such as this, it is best to approach each subdivision of the question individually. You may find it useful to compare the subdivision you are discussing to another subdivision to express why one subdivision reaches a different outcome from another. The statement is certainly a misrepresentation (see Topic 9), assuming it is a statement of fact, not opinion. If the statement is not a misrepresentation, it may be incorporated into the contract or form a collateral contract (a contract which is separate from the contract of sale): see Heilbut, Symons & Co v Buckleton (1913). If it is a contractual warranty, then A is liable to B for a breach of contract. If it is a misrepresentation, then A may be liable to B for damages under the Misrepresentation Act 1967, or for a fraudulent misrepresentation (Derry v Peek) or for a negligent misrepresentation (Hedley Byrne v Heller). Regardless of the type of misrepresentation, A should be able to have the contract rescinded if the misrepresentation is actionable. This may be actionable under s.2(1) of the Misrepresentation Act 1967 (The elements of an actionable misrepresentation can be found in Topic 9) – does A have reasonable grounds at the time of making the statement for believing that the picture is a Carr and does he have these grounds up to the time the contract is entered into? (See Howard Marine v Ogden.) If A does not have these grounds, then he is liable to B under s.2(1). Note in this connection that A is a dealer. If A does have these grounds, then the parties are labouring under a mistake. The problem here is that this is a mistake as to a quality (who painted the painting) of the subject matter (the painting). You need to apply the decision in Bell v Lever Bros and this rarely results in an operative mistake. The principle established by Lord Atkin is: ‘Mistake as to quality of the thing contracted for raises more difficult questions. In such a case mistake will not affect assent unless it is the mistake of both parties, and is to the existence of some quality which makes the thing without the quality essentially different from the thing as it was believed to be.’ Applying this principle, it will be difficult to establish the mistake as operative. Does the mistake as to the quality ‘make the thing without the quality essentially different from the thing as it was believed to be’? It is still the same painting. It was displayed by the vendor to the purchaser – they identified it by the sight of the painting before them. The identity of the artist is simply a quality of the painting. On the other hand, there may be limited scope to assert that this quality is so important that it is the feature by which the painting is identified. (Certainly conditions in the modern art market, where buyers are more concerned with the creator of art rather than the art itself, would support such an argument.) Unless the artist can be identified as critical to this contract, the contract will not be set aside as void. In this instance both parties may be mistaken, but their mistake is not shared. Therefore, mutual mistake – and Bell v Lever Bros – does not apply. Is there a lack of agreement? On the one hand, they do seem to be dealing in different things. On the other hand, the painting is before them – this situation is unlike that in Raffles v Wichelhaus. The offer is to sell the painting before them; the acceptance is to buy the painting before them. The parties are not at cross purposes. What is really going on is that B thinks he is getting the better of A – and courts will not intervene to relieve a party from a bad bargain or for not receiving what he gambled upon receiving. This is, in other words, a case of caveat emptor. In this instance, mere knowledge on the part of A that B thinks that the painting is an original is not sufficient to render the contract void. A has to know of the mistake of B and know that it is a mistake as to the nature of the promise made by A. The principle is set out by Hannen J in Smith v Hughes: ‘In order to relieve the defendant it was necessary that the jury should find not merely that the plaintiff believed the defendant to believe that he was buying old oats, but that he believed the defendant to believe that he, the plaintiff, was contracting to sell old oats.’ There is nothing to indicate that B’s mistake is as to the nature of the promise made by A. In this variant, the mistake of B does seem to be with respect to the nature of the promise made by A. A knows of B’s mistake. Accordingly, the principle in Smith v Hughes (above) applies and the contract is void. 8.3.2 Mistakes as to identity This area of law has received recent clarification from the House of Lords in the case of Shogun Finance v Hudson  UKHL 62. Prior to this decision, there was some uncertainty as to the application of a doctrine of mistake as to identity. Virtually all mistake as to identity cases arise as the result of the fraudulent actions of a wrongdoer, the ‘rogue’. In the typical situation a rogue presents himself to an innocent vendor and offers to purchase a good. The rogue deceives the vendor as to his identity. The vendor sells the goods to the rogue and the rogue departs with the goods. The vendor is usually given a cheque which is not honoured. When the vendor seeks the return of the goods from the rogue, he discovers: the rogue for what he is that the rogue has vanished that the rogue has sold the goods to an innocent third party. The court is thus faced with litigation between the (deceived and mistaken) vendor as claimant and the (innocent) third party as defendant in which the claimant seeks the return of his goods. The court must decide which of these two ‘victims’ will bear the cost of the rogue’s deception. If the contract between the rogue and the vendor is good, the cost will be borne by the vendor because by this contract, the rogue acquired good title to the goods and could sell them on to the third party. If the contract between the rogue and the vendor is void, the cost will be borne by the third party because the rogue never acquired title to the goods. The vendor thus recovers his goods from the third party. A decision, as required here, as to which of two victims should bear the full consequences of a fraud perpetrated by a third party will always be a difficult one. This difficulty prompted a suggestion from Devlin LJ in Ingram v Little  1 QB 31 that a mechanism should be found whereby the loss was effectively shared by these two parties. The suggestion has never been acted on. You must also note that in these circumstances, misrepresentation is also involved. In the above circumstances, the rogue induced the contract by a misrepresentation. If the contract is not void for mistake, it is voidable for misrepresentation. However, the vendor must then set aside or rescind the contract before the innocent third party contracts with the rogue. If he does not, the first contract can no longer be set aside because of the involvement of the third party’s rights. That is to say, if the third party contracts with the rogue before the contract between the rogue and the vendor is rescinded, then the vendor loses the right to rescind the first contract. This matter will be examined further in the next topic on misrepresentation in Section 9.2.1. In most mistaken identity cases, the policy arguments will favour protection of the third party. The vendor assumed a normal commercial risk in selling on credit, or accepting a payment by cheque. Because it was the vendor’s choice to assume this risk, there is no valid reason why he should be able to pass the resulting loss on to the third party. This reasoning is less convincing when the third party appears to buy the goods at undervalue. Such a sale should perhaps make the purchaser suspicious. In Lewis v Averay  2 All ER 229 the sale to the rogue was for £450 but the rogue’s sale of the same property to the ‘innocent’ third party was for £200. The House of Lords in Cundy v Lindsay  3 App Cas 459, however, found differently. In this case, the rogue presented himself in such a way as to appear to be a legitimate firm. The innocent party thought that they were dealing with a legitimate firm and shipped the goods to the rogue. In these circumstances the House of Lords found that the contract was void because there was a lack of consensus. Cundy v Lindsay thus operates to establish the proposition that: if A thinks he has agreed with C because he believes B, with whom he is negotiating, is C and if B is aware that A did not intend to make any agreement with him and if A has established that the identity of C was a matter of crucial importance then the contract will be void. Later courts often found that in seemingly similar circumstances there was a contract. Thus, a mistake as to the attributes of identity (such as creditworthiness) will generally be insufficient to render the contract void: see King’s Norton Metal Co v Edridge  14 TLR 98. In addition, in some circumstances the contract is made inter praesentes – that is to say face-to-face – and the vendor meets the rogue and contracts with him. In these cases, courts have frequently said that the rogue is identified by ‘sight and hearing’: see Phillips v Brooks  2 KB 243 and Lewis v Averay  1 QB 198. Where the parties are before each other, a presumption arises that the mistaken/deceived party intended to contract with the person before him and a contract has arisen. The existence of such a presumption has been doubted in the past, but it was accepted by the majority of the law lords in Shogun Finance v Hudson. In Shogun Finance v Hudson a rogue entered into a written contract of hire purchase with Shogun Finance to purchase a vehicle on credit. The rogue fraudulently assumed the identity of another person. The majority of the law lords found that in these circumstances, identity was critical to Shogun Finance because it was necessary for them to check the credit rating of their potential borrowers. The apparent contract was a nullity due to the mistake of identity and an absence of consensus. The majority also approved of a presumption that in the face-to-face cases the party deceived intended to deal with the person physically before him and the result is the formation of a voidable contract. The presumption may be rebutted. Shogun Finance, however, was not a case of a face-to-face transaction and the presumption did not arise. A further effect of this decision is that it is unlikely that the Court of Appeal’s decision in Ingram v Little (1961) will be followed in the future. The dissenting law lords disapproved of drawing a distinction based on whether the rogue’s fraud was perpetrated in writing or face-to-face. The dissenting law lords were concerned with the effect of fraud upon contractual formation. They also sought to give coherence to an uncertain area of law. Consequently, they disapproved of Cundy v Lindsay and what they viewed as an untenable distinction based on the method by which the rogue perpetrated his fraud. Both dissenting law lords believed that in these circumstances of mistaken identity a voidable contract arose. Summary In reviewing this area, you should keep in mind the distinction between contracts formed between the parties face-to-face and contracts formed at a distance. Where the apparent contract is formed at a distance, and probably in some form of writing, it is likely that the apparent contract is void for mistake. For this to occur, however, the identity of the party must be critical in the formation of the contract. Where the contract is formed between parties who appear before each other, a presumption arises that the mistaken party intends to contract with the person before him. The result is a contract which is voidable at the option of the mistaken party. It is uncertain at this stage what is necessary to rebut this presumption. Study task 10 What were the practical and commercial concerns of the dissenting law lords in Shogun Finance v Hudson? Show feedback Lord Nicholls and Lord Millet found commercial sense in allocating the risk of fraud to the party who chose to part with his goods on credit, rather than a third party who purchases from the rogue. In addition, technological changes in the methods of communication may render the distinction between contracts formed face-to-face and contracts formed at a distance untenable. Study task 11 M sends an order for goods to N on paper which is headed ‘Greenhill & Co’ and shows a picture of a large factory. N sends the goods on credit. Greenhill & Co does not exist. M resells the goods to P and then disappears. Advise N. Show feedback Property in the goods will be P’s. When N supplied the goods on credit they took a commercial risk and they must bear the cost of this risk. Identity was not material to the formation of this contract because there was, in fact, no company by the name of Greenhill & Co. Because of this, this situation is distinguishable from Cundy v Lindsay (1878), where there was a reputable firm by the same name and the mistaken party thought that he was contracting with the reputable firm. See the decision in King’s Norton Metal v Edridge, Merrett (1897). Study task 12 Suppose the rogue pretends to be a person who has (unknown to the parties) already died – would the contract be void or voidable? Show feedback If the person did exist, the fact that their death was unknown to the parties should not be relevant. Applying the principle in Cundy v Lindsay, ‘there was no consensus of mind which could lead to any agreement or any contract whatsoever’ between the rogue and the innocent party. The innocent party is attempting to contract with the third party; in the absence of consensus, the contract is void. Study task 13 Does it matter if the rogue pretends to be a fictitious person or assumes the identity of a real person? Show feedback It does matter if the rogue assumes the identity of a fictitious party or a real party – but only if the identity is material to the contract. This will generally mean that the mistaken party is mistaken as to identity from the outset of the process of negotiation. If the identity only becomes relevant at the point of payment (will credit be extended or a cheque accepted) then identity will not be viewed as material and the contract will be voidable for misrepresentation. Where identity is relevant from the outset of negotiations, it does matter if the identity assumed is of a real or a fictitious person. In Cundy v Lindsay, the House of Lords found that where the rogue pretended to be a real person, the contract was void. The mistaken party had meant to deal with the reputable firm; with the rogue, there was no consensus and thus no contract. In King’s Norton Metal v Edridge, Merritt & Co (1897), in contrast, there has been no firm by the name given and there was a contract with the rogue. 8.3.3 Documents signed under a misapprehension as to their contents Clearly a person must normally take full responsibility for their signature and it is up to them to make sure that they appreciate what they are signing. Exceptionally, however, a person may have been so seriously misled that the document is held to be void under the defence of non est factum (‘it is not his deed’). See Gallie v Lee  AC 1004 where the House of Lords rejected the previous test, based upon a distinction – apparently certain but really meaningless – between contents and character, in favour of an openly flexible criterion. The defence is available to a person who signed the documents with a fundamental misapprehension as to the substance of the document – provided that the person who signed the documents took all due care. You will note that the burden of proof lies on the signer to show that he was not negligent – and this is a burden he will normally be unable to discharge. A rare successful plea of non est factum was Trustees of Beardsley Theobalds Retirement Benefit Scheme v Yardley  EWHC 1380 (QB) by a party who signed as a guarantor of a lease to his employer after he was led to believe that his signature was necessary only to witness the signatures of others. 8.4 Mistake in equity Mistake in equity is not an easy topic to study and there is, at present, considerable uncertainty as to whether or not a contract can be avoided in equity. The uncertainty arises from the decision in The Great Peace. 8.4.1 The end of the equitable jurisdiction to set aside on terms We have seen that the doctrine of common mistake at law operates within narrow boundaries. In the past this strict and ungenerous (i.e. to relief) approach at common law has mitigated the courts’ ability to set aside a contract in equity where there was a common mistake, but not one which is of sufficient importance to render the contract void at law. In Solle v Butcher  1 KB 671, the Court of Appeal stated that the House of Lords in Bell v Lever Bros was only concerned with mistake at law and not in equity. Lord Denning then recognised a more flexible doctrine of equitable mistake. As this equitable doctrine was the exercise by the courts of a power to set aside a contract the court could do substantial justice between the parties by imposing conditions when exercising the power. An example of its exercise was Grist v Bailey  Ch 532 where a house was sold for £850 in the mistaken belief that it was occupied by a protected tenant. The tenant had, unknown to the parties, died and so, without a sitting tenant, the house was worth £2,250. The sale was set aside subject to the condition that the owner should offer it for sale to the disappointed buyer at the full market value. There was, however, an uneasy relationship between mistake at law and mistake in equity. It was in this context that the Court of Appeal gave their decision in The Great Peace. The case involved two ships. The Cape Providence suffered structural damages and it was feared that she might sink. The defendant was hired to salvage The Cape Providence. To this end, they contracted with the claimant that the claimant’s ship, The Great Peace, would travel to The Cape Providence to escort the vessel and stand by for the purpose of saving lives. At the time the defendant approached the claimant, the defendant (and from them the claimant) mistakenly believed that the ships were 35 miles apart. Shortly after the contract was concluded, the defendant discovered that the ships were 410 miles apart. After they had procured a closer substitute ship, the defendant refused to perform their contract with the claimant. At trial, the defendant asserted that the contract was void for mistake at law or voidable in equity by reason of mistake. The trial judge denied this assertion. On appeal, the Court of Appeal considered the extent of the doctrine of mistake in equity. The Court of Appeal extensively reviewed the cases of Bell v Lever Bros and Solle v Butcher. The concept of mistake in equity was considered both before and after Bell v Lever Bros. Lord Phillips MR concluded that it was impossible to reconcile the two cases. Bell v Lever Bros prevailed; Solle v Butcher was disapproved. The House of Lords in Bell v Lever Bros had not overlooked an equitable right to rescind an agreement that was valid at law. There was no such equitable right and accordingly no separate doctrine of mistake in equity existed to provide relief for a common mistake as to a quality of the subject matter of the contract. In the case before them, the difference in the proximity between the two ships as they were believed to be and as they actually were was not a sufficiently fundamental mistake to render the contract void. The contractual venture could still be performed. Accordingly, the appeal was dismissed: the defendant was liable under the contract to pay the cancellation fee to the claimant. In Pitt v Holt  UKSC 26, the Supreme Court stated that The Great Peace had ‘effectively overruled’ Solle v Butcher. 8.4.2 Rectification Equitable relief takes three principal forms. The first is rectification and this is a remedy which is concerned with correcting a mistake which occurs not in the making of the agreement, but in the recording of the agreement. There is little difficulty in ascertaining the principles of this form of relief. The possibility of rectification exists where a written contract or deed fails to express the common intention of the parties. Thus, if A and B negotiate the price of their contract in American dollars, agree on a price in American dollars, but then wrongly provide the price in Canadian dollars in their written contract, the written contract can be ‘rectified’ or fixed to accord with their actual agreement. Note that the mistake must be in the recording of the agreement (e.g. in the documents relating to the negotiation). In Chartbrook v Persimmon Homes Ltd  UKHL 38 the House of Lords held that if the parties had a common continuing intention, in respect of which rectification was sought, it would be granted. It had to be shown, to receive rectification, that the parties were in complete agreement as to the terms of their contract but that, by an error, incorrectly recorded them. This approach was  applied to a rent review clause in a lease that was intended to increase the rent in line with retail prices. Unfortunately, it was drafted in a way that meant that, if it was applied literally, the rent would increase exponentially. As both the mistake made and the common intention were clear, the Court of Appeal was able to rectify the agreement to conform to the parties’ intentions (Monsolar IQ Ltd v Woden Parl Ltd  EWCA Civ 961). The broader basis of the doctrine has recently been explained by Leggatt LJ in the Court of Appeal in FSHC Group Holdings Ltd v GLAS Trust Corp (2019) as resting upon an equitable principle of good faith (i.e. a party will not be allowed to enforce the terms of a written contract when that would be unconscionable because it was inconsistent with the parties’ mutual intentions at the time of contracting). Because rectification is an equitable device the usual restrictions as to its application apply. Such restrictions encompass matters such as a lapse of time (a claim for rectification will be barred when a period of time has elapsed), or the intervention of third party rights (a claim for rectification cannot be made against a bona fide purchaser for value without notice of the mistake) or the conduct of the party who seeks rectification (it is an equitable maxim that he who comes to equity must come with clean hands). In DS-Rendite-Fonds Nr 106 VLCC Titan Glory GmbH & Co Tankschiff KG v Titan Maritime SA  EWHC 3492 (Comm) the court held that an entire agreement clause in a contract was not a bar to rectification. 8.4.3 Specific performance The remedy of specific performance is discussed in Topic 15. It has its origins in the jurisdiction of the Lord Chancellor, subsequently exercised by the Chancery Division of the High Court, to supplement the remedies available in other courts. The origin of this jurisdiction in the chancery or equity courts has a consequence for its availability today because the principal characteristic of equitable relief is that it is discretionary. To the extent that the exercise of this discretion is influenced by the existence of a mistake it may be thought of as part of the law of mistake. See, for example, the contrasting cases of Denny v Hancock  6 Ch App 1 and Tamplin v James  15 Ch D 215. Study task 14 Victor sells a painting to Peter, an art expert, for £50. It is in fact a masterpiece worth £50,000. To what extent, if any, can a court grant equitable relief? Show feedback This mistake is probably not sufficient to avoid the contract at common law. It is a mistake as to a quality of the subject matter of the contract – but it is not sufficiently fundamental within the test established by Lord Atkin in Bell v Lever Bros (1931). The contract thus stands at law and must be considered in equity. Following the decision in The Great Peace, there is no scope for a doctrine of mistake in equity. Accordingly, Victor is bound. However, the argument can be made that the behaviour of Peter is objectionable and that he is seeking to take advantage of Victor. Peter, as an art expert, must be aware that Victor has seriously undervalued the painting and is unaware of its worth. If Victor refuses to deliver the painting, it is unlikely that a court of equity will order specific performance of the contract. Because this case involves an order for specific performance, it is possible to argue that the decision in The Great Peace (which involved the question of rescinding the contract) is not applicable to these circumstances. There is an older line of authorities dealing with the refusal to order specific performance on grounds of mistake. Nonetheless, Victor would be liable to pay damages to Peter if Peter’s claim for specific performance fails. Summary Since the Court of Appeal’s decision in The Great Peace the jurisdiction to set aside a contract in equity, previously associated with Solle v Butcher, no longer exists. Rectification is, thus, concerned with mistakes in the recording of the agreement rather than in the making of the agreement. A court of equity may refuse to grant an order for specific performance in circumstances where a mistake is present. Equitable relief is in all cases discretionary and so may be excluded by various circumstances sometimes called bars (e.g. excessive delay, where restitution is impossible and where there is an intervention of an innocent third party purchaser). These factors are discussed further in Section 9.2.1. Examination tips With regard to mistake questions generally, you are well advised to follow the approach of Steyn J in Associated Japanese Bank v Credit du Nord  1 WLR 255 subject to the decision in The Great Peace on the availability of relief in equity. That is to say, consider first whether or not the contract is void at law. It may assist you if you try to consider what type of mistake exists in the given situation and compare it to decided cases where the mistake was found to be operative. Exam question activity 1 Try to answer the following question: Hammer, an auctioneer, sold a collection of paintings by auction. Each painting was fully described in the catalogue. When Hammer invited bids for Lot 15 – described as ‘Country Scene, artist unknown’ – his assistant Mallet inadvertently held up Lot 16 instead for the bidders to see. Lot 16 was described in the catalogue as ‘Village Life, (?) school of Brushman’ but Sickle, who was sitting in the front row, immediately recognised it as a lost masterpiece by Brushman himself. No other bidders noticed Mallet’s error and Sickle’s bid of £25 was accepted by Hammer. When Hammer realised what had happened he refused to let Sickle have the painting, which is worth £5,000. Advise Sickle.