Saturday, August 06, 2005

Contract Law - Common Mistakes

MISTAKES

Where one party is mistaken as to the identity of the other party to a contract, this mistake can render the contract void. If the contract is void, no rights can flow from it as the subject matter did not passed to the imposter, and the owner can recover the goods from whoever has them in possession. If however, the misrepresentation merely renders the contract voidable, the original owner’s claim for recovery might be defeated by the operation of s.23 SOGA 1979. Under this section, where the imposter sells the goods to a third party, the seller has a voidable title to the goods. But if the title for the goods had not be avoided at the time the sale to the third party took place, then the third party would had acquired good title to the goods provided that he bought them in good faith and without notice of the defective title.

In Cundy v Linsay, the rogue, when ordering goods, had sought to give the impression that he was from the reputable firm Blenkiron & Co by styling himselfas Blenkarn and giving an address in the same street but at a different number. The owner believed that he was contracting with the firm he knew, dispatched the goods to the rogue who then sold them to an innocent third party. The HL held that the contract with the rogue was void for mistake. However, in the case of King’s Norton Metal Co Ltd v Edridge Merret, the rogue placed an order, describing himself as trading as Hallam & Co, which is fictitious. The CA held that as Hallam & Co did not exist, the intention could only have been to contract with the writer of the order, and therefore, the contract is only voidable and not void. This decision was followed in Phillips v Brooks Ltd. (CA).

On similar facts, a contrary decision was reached in Ingram v Little. In purchasing a car, the rogue had proffered a cheque in payment which the plaintiff found unacceptable and declared that the deal was off. Thereupon, the rogue falsely declared that he was a Mr. Hutchinson and furnished certain address. After checking the address, the plaintiff was satisfied and accepted the cheque. The rogue then sold the car to an innocent third party. However, the court held that it was a mistake as to identity and that the contract is void. The third party thus had no good title to the property. A case similar to this is Lewis v Avery, the facts of which are virtually indistinguishable from Ingram v little. Here a cheque was accepted in payment for the purchase of a car after the rogue produced a fraudulent document purporting to prove that he was Richard Greene (then a well known actor0. the CA held that this deceit only rendered the contract voidable, and not void, and the innocent third party’s rights prevailed.

The effect of holding the contract void thus prejudiced the third party who might have acted in perfect good faith. Therefore, the Law Reform Committee has recommended that:

‘ … Contracts which are at present void because the owner of the goods was deceived or mistaken as to the identity of the person with whom he dealt should on future be treated as voidable so far as third parties are concerned’: 12th. Report.

If this recommendation is legislated, it would bring a measure of certainty. Admittedly, it might cause hardship to deceived owners who would then have to manage their own risks.


COMMON MISTAKE

Case: Great Peace Shipping Ltd v Tsavliris Salvage (International) Ltd

The story concerns two vessels, the "Cape Providence" and the "Great Peace". In September 1999 the "Cape Providence" was on her way from Brazil to China with a cargo of iron ore when she suffered serious structural damage in the South Indian Ocean. The defendants learned that the vessel was in difficulties and offered their salvage services, which were accepted on the terms of Lloyd's Open Form of salvage agreement. To find a tug they approached a firm of London brokers, Marint. The individuals involved at Marint were Mr Graeme Little and Mr Andrew Holder. A tug was found, but it was going to take five or six days for the tug to reach the "Cape Providence" from Singapore. There was serious concern that in the meantime the vessel might go down with the loss of her crew. So Mr Little was asked by the appellants' representative, Captain Lambrides, to try to find a merchant vessel in the vicinity of the "Cape Providence" which would be willing to assist, if necessary, with the evacuation of the crew.

Mr Little contacted Ocean Routes, a respected organisation which provides weather forecasting services to the shipping industry and receives reports about vessels at sea. Ocean Routes gave Mr Little the names of four vessels reported to be in the area. He was told that the "Great Peace" , a vessel owned by the respondents, was the nearest to the "Cape Providence" and should be close to a rendezvous position within about twelve hours. Mr Little noted the name of the four vessels and the estimated position of the "Great Peace". Unfortunately the position which he was given was wrong.

At 20.30 on Friday 24 September 1999 Mr Little telephoned a contact number for the "Great Peace"'s managers, Worlder Shipping Limited of Hong Kong. The call was answered by Mr Pierre Lee. By Hong King time it was 03.30 on Saturday 25 September.

Mr Lee was a businessman with no seafaring experience. He had never personally negotiated the fixture of a vessel, because his company always used brokers. But it was the middle of the night and Mr Little explained that the situation was an emergency because of the potential danger to the crew. They did not discuss the exact position of either vessel. Mr Little simply advised Mr Lee that he believed from information received from Ocean Routes that the "Great Peace" was the closest vessel to the "Cape Providence". Mr Lee was not able to promise help there and then, because the "Great Peace" was under charter, carrying a cargo of soya beans from New Orleans to China, and the charterers would need to be consulted, but he asked Mr Little to send him details by fax.

Immediately after the conversation Mr Little faxed Mr Lee as follows:

Further to our telcon at 22.22 hours BST 24 September, we are working on behalf of the owners of a cape size bulk carrier which has suffered serious structural damage in the southern Indian Ocean. Her position at 10.27 hours BST today was 29 40S/80 20E. She is proceeding at 5 knots on course 050 degrees direction Sunda Strait. Owners have mobilised a tug from Singapore which should reach the casualty in the next 5/6 days. We understand from Ocean Routes that your vessel "Great Peace" is in close proximity to the casualty and have been asked by hirers to check whether it would be possible to charter the "Great Peace" on a daily hire basis to escort the casualty until arrival of the tug.

We would appreciate greatly if you can check soonest with charterers whether they can agree to the request, bearing in mind that the casualty is in serious danger.

Shortly after midnight, Mr Lee phoned Mr Holder (who had taken over from Mr Little) and put forward an offer for the chartering of the "Great Peace". During the conversation all the terms necessary for a contract were discussed. The contract was to be on the basis of a Bimco Towhire form of agreement. (This was somewhat odd because the "Great Peace" was a bulk carrier and was not going to be towing the "Cape Providence", but the circumstances were unusual and the Bimco Towhire agreement was the form of contract with which Mr Holder was familiar). The hire was to be for a minimum of 5 days. The purpose of the charter was to be to escort and stand-by the "Cape Providence" for the purpose of saving life. Delivery was to be at the "Great Peace"'s location at the time of the agreement and the hire would commence as soon as she was fixed and diverted (it being the mutual, and correct, assumption of Mr Lee and Mr Holder that there would be no practical difference between the vessel's position at the time of the agreement and at the time of deviation, since it was contemplated that there would have to be some alteration of course in order to effect a rendezvous and that the alteration of course would happen as soon as instructions could be given on the conclusion of the agreement).

During the conversation Mr Holder asked Mr Lee for the position and speed of the "Great Peace", and Mr Lee replied that he would check these matters with the master when he knew if the appellants were interested in the terms of the offer.

Captain Lambrides decided not to accept the offer at once, but at 0640 he gave instructions to Mr Holder to fix the vessel at a gross rate of US$16,500 per day (which Mr Holder knew would be acceptable to Mr Lee from their earlier conversation).

Mr Holder thereupon called Mr Lee. They went through and confirmed the terms of the fixture.

Afterwards Mr Holder sent a fax to Mr Lee thanking him for his assistance with the fixture of the "Great Peace" for the services of escort/stand-by to the "Cape Providence"; saying that he would complete the recap of the main fixture terms shortly, giving details of the "Cape Providence"'s latest position, course and speed in order to enable the vessels to rendezvous; and concluding:

Please instruct your master to contact the master of "Cape Providence" and alter course to rendezvous with the vessel as soon as possible.

As requested, Mr Lee faxed instructions to the master of the "Great Peace" to alter course towards the "Cape Providence". He sent a copy of the fax to Mr Holder.

At 08.17 Mr Lee gave Mr Holder contact details of the "Great Peace", which Mr Holder passed on to Captain Lambrides. A few minutes later, at 08.29, the master of the "Great Peace" sent a message to Worlder that he had contacted the "Cape Providence" to find her latest position and was altering course "right now".

Meanwhile, at 08.25, Captain Lambrides called Mr Holder to say that the vessels were 410 miles away from each other. This was not something known to Mr Holder or Mr Lee, so the likely inference is that the master of the "Cape Providence" must have reported the positions of the vessels to the appellants after his conversation with the master of the "Great Peace".

If the information previously given to Marint by Ocean Routes had been accurate, the vessels should have been only about 35 miles apart when the contract was concluded.
Captain Lambrides told Mr Holder that he was looking to cancel the "Great Peace", but not yet, because he first wanted to know if there was a nearer available vessel which could provide assistance to the crew of the "Cape Providence".

Mr Holder made a number of unsuccessful enquiries, about which he reported to the appellants, at 0924, recommending that the "Great Peace" should be allowed to continue her voyage towards the "Cape Providence".

About the same time as that message was being sent, the "Cape Providence" was passed by a vessel called the "Nordfarer". By chance the charterers of the "Nordfarer" were also the charterers of the "Cape Providence" and so had an interest in assisting her. At 10.10 the appellants told Mr Holder that they had contracted with the owners of the "Nordfarer" directly and instructed him to cancel the "Great Peace".

At 10.25 Mr Holder told Mr Lee that the "Great Peace" was no longer required, i.e. she was cancelled. They discussed possible financial terms.

At 11.00 Mr Lee sent a fax to Mr Holder, confirming the cancellation and saying that he would do his best to persuade the owners of the "Great Peace" to accept 2 days' daily hire in place of the minimum 5 days due under the contract. After speaking to the appellants, Mr Holder told Mr Lee that the appellants were not prepared to pay any sum. So the respondents issued proceedings.

The issues

The claimants claimed $82,500 as monies payable under the terms of the contract. Alternatively, they claimed the same sum as damages for wrongful repudiation of the contract.

The defendants contended that the purported contract had been concluded by reason of a fundamental mistake of fact in that both parties proceeded on the fundamental assumption that the "Great Peace" was "in close proximity" to the "Cape Providence", when she was not. It followed either that the contract was void in law, or that the contract was voidable and the defendants were entitled to relief in equity by way of rescission.

In oral argument in the court below, Mr Reeder QC for the defendants defined "close proximity" as meaning sufficiently close to enable the "Cape Providence" to have come up with the "Great Peace" in the space of a few hours.

Toulson J. rejected the defendants' contentions and awarded the claimants the sum claimed. By this appeal the defendants reassert their defence based upon mistake.

In the present case the parties were agreed as to the express terms of the contract. The defendants agreed that the "Cape Providence" would deviate towards the "Great Peace" and, on reaching her, escort her so as to be on hand to save the lives of her crew, should she founder. The contractual services would terminate when the salvage tug came up with the casualty. The mistake relied upon by the defendants is as to an assumption that they claim underlay the terms expressly agreed. This was that the "Cape Providence" was within a few hours sailing of the "Great Peace". They contend that this mistake was fundamental in that it would take the "Great Peace" about 39 hours to reach a position where she could render the services which were the object of the contractual adventure.

JUDGMENT

CA: Lord Phillips of Worth Matravers MR, May and Laws LJJ: 14 October 2002


There was no jurisdiction in equity to grant rescission of a contract on the ground of common mistake where that contract was valid and enforceable on ordinary principles of contract law.

The Court of Appeal so held, dismissing the appeal of the defendant, Tsavliris Salvage (International) Ltd, against the order of Toulson J who on 9 November 2001 had given judgment for the claimant, Great Peace Shipping Ltd, in the sum of US$82,5000 with interest on its claim for moneys payable under a contract, whereby the defendant had hired the claimant's vessel to escort and standby a severely damaged ship, or damages for wrongful repudiation of the contract.

The contract provided for a right to cancel the hire subject to the payment of a cancellation fee of five days' hire. When the contract had been made both parties had believed the vessels to be in close proximity. On discovering their mistake the defendant had not repudiated the contract until a closer vessel had agreed to assist.

Lord Phillips MR

Introduction


1. In 1932 in Bell v. Lever Brothers Ltd [1932] AC 161 Lord Atkin made a speech which he must have anticipated would be treated as the definitive exposition of the rules of law governing the effect of mistake on contract. In 1950 in Solle v. Butcher [1950] 1 KB 671 Denning LJ identified an equitable jurisdiction which permits the court to intervene where the parties have concluded an agreement that was binding in law under a common misapprehension of a fundamental nature as to the material facts or their respective rights. Over the last fifty years judges and jurists have wrestled with the problem of reconciling these two decisions and identifying with precision the principles that they lay down.

2. In the court below Toulson J. used this case as a vehicle to review this difficult area of jurisprudence. He reached the bold conclusion that the view of the jurisdiction of the court expressed by Denning LJ in Solle v. Butcher was "over-broad", by which he meant wrong. Equity neither gave a party a right to rescind a contract on grounds of common mistake nor conferred on the court a discretion to set aside a contract on such grounds.

32. Thus what we are here concerned with is an allegation of a common mistaken assumption of fact which renders the service that will be provided if the contract is performed in accordance with its terms something different from the performance that the parties contemplated. This is the type of mistake which fell to be considered in Bell v. Lever Brothers. We shall describe it as "common mistake", although it is often alternatively described as "mutual mistake".

33. Mr Reeder for the defendants puts his case in two alternative ways. First he submits that performance of the contract in the circumstances as they turned out to be would have been fundamentally different from the performance contemplated by the parties, so much so that the effect of the mistake was to deprive the agreement of the consideration underlying it. Under common law, so he submits, the effect of such a mistake is to render the contract void. Mr Reeder draws a close analogy with the test to be applied when deciding whether a contract has been frustrated or whether there has been a fundamental breach. The foundation for this submission is Bell v. Lever Brothers.

34. If the facts of this case do not meet that test, Mr Reeder submits that they nonetheless give rise to a right of rescission in equity. He submits that such a right arises whenever the parties contract under a common mistake as to a matter that can properly be described as "fundamental" or " material" to the agreement in question. Here he draws an analogy with the test for rescission where one party, by innocent misrepresentation, induces the other to enter into a contract – indeed that is one situation where the parties contract under a common mistake. The foundation for this submission is Solle v. Butcher.

50. It is generally accepted that the principles of the law of common mistake expounded by Lord Atkin in Bell v. Lever Brothers were based on the common law. The issue raised by Mr Reeder's submissions is whether there subsists a separate doctrine of common mistake founded in equity which enables the court to intervene in circumstances where the mistake does not render the contract void under the common law principles. The first step is to identify the nature of the common law doctrine of mistake that was identified, or established, by Bell v. Lever Brothers.

87. Two cases where common mistake has been held to avoid the contract under common law call for special consideration. A case which is by no means easy to reconcile with Bell v. Lever Brothers is Scott v. Coulson [1903] 2 Ch 249. A contract for the sale of a life policy was entered into in circumstances in which both parties believed that the assured was alive. The price was paid and the policy assigned. The contract price was little more than the surrender value of the policy. In fact, the assured had died before the contract was concluded and the policy thus carried with it entitlement to the full sum assured. The vendors succeeded, in proceedings in the Chancery Court, in having the transaction set aside. In the Court of Appeal, Vaughan Williams LJ described the position as follows:

If we are to take it that it was common ground that, at the date of the contract for the sale of this policy, both the parties to the contract supposed the assured to be alive, it is true that both parties entered into this contract upon the basis of a common affirmative belief that the assured was alive; but as it turned out that this was a common mistake, the contract was one which cannot be enforced. This is so at law; and the plaintiffs do not require to have recourse to equity to rescind the contract, if the basis which both parties recognised as the basis is not true.

89. The other case is the decision of Steyn J. in Japanese Bank v. Credit du Nord [1989] 1 WLR 257. The plaintiff bank entered into an agreement with a rogue under which he purported to sell and lease back four specific machines. The defendant bank agreed with the plaintiff bank to guarantee the rogue's payments under the lease-back agreement. The machines did not, in fact, exist. The rogue defaulted on his payments and the plaintiffs called on the guarantee. The defendants alleged (1) that on true construction of the agreement it was subject to an express condition precedent that the four machines existed; if this was not correct: (2) that the agreement was void at law for common mistake; if this was not correct the agreement was voidable in equity on the ground of mistake and had been avoided.

90. The first head of defence succeeded. Steyn J. went on, however, to consider the alternative defences founded on mistake. After reviewing the authorities on common mistake, he reached the following formulation of the law:

The first imperative must be that the law ought to uphold rather than destroy apparent contracts. Secondly, the common law rules as to a mistake regarding the quality of the subject matter, like the common law rules regarding commercial frustration, are designed to cope with the impact of unexpected and wholly exceptional circumstances on apparent contracts. Thirdly, such a mistake in order to attract legal consequences must substantially be shared by both parties, and must relate to facts as they existed at the time the contract was made. Fourthly, and this is the point established by Bell v. Lever Brothers Ltd [1932] A.C. 161, the mistake must render the subject matter of the contract essentially and radically different from the subject matter which the parties believed to exist. While the civilian distinction between the substance and attributes of the subject matter of a contract has played a role in the development of our law (and was cited in speeches in Bell v. Lever Brothers Ltd.), the principle enunciated in Bell v. Lever Brothers Ltd is markedly narrower in scope than the civilian doctrine. It is therefore no longer useful to invoke the civilian distinction. The principles enunciated by Lord Atkin and Lord Thankerton represent the ratio decidendi of Bell v. Lever Brothers Ltd. Fifthly, there is a requirement which was not specifically discussed in Bell v. Lever Brothers Ltd. What happens if the party, who is seeking to rely on the mistake, had no reasonable grounds for his belief? An extreme example is that of the man who makes a contract with minimal knowledge of the facts to which the mistake relates but is content that it is a good speculative risk. In my judgment 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: cf McRae v. Commonwealth Disposals Commission (1951) 84 C.L.R. 377, 408. That is not because principles such as estoppel or negligence require it, but simply because policy and good sense dictate that the positive rules regarding common mistake should be so qualified.

93. Steyn J. held that the test of common mistake was satisfied. He held, at p.269:

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. Indeed the analogy of the classic res extincta cases, so much discussed in the authorities, is fairly close. In my judgment the stringent test of common law mistake is satisfied: the guarantee is void ab initio.

95. In Solle v. Butcher Denning LJ held that a court has an equitable power to set aside a contract that is binding in law on the ground of common mistake. Subsequently, as Lord Denning MR, in Magee v. Pennine Insurance Co. [1969] 2 QB 507 at 514, he said of Bell v. Lever Brothers:

I do not propose today to go through the speeches in that case. They have given enough trouble to commentators already. I would say simply this: A common mistake, even on a most fundamental matter, does not make a contract void at law: but it makes it voidable in equity. I analysed the cases in Solle v. Butcher [1950] 1 K.B. 671, and I would repeat what I said there, at p.693:

A contract is also 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.

96. Neither of the other two members of the court in Magee v. Pennine Insurance Co. cast doubt on Bell v. Lever Brothers. Each purported to follow it, although reaching different conclusions on the facts. It is axiomatic that there is no room for rescission in equity of a contract which is void. Either Lord Denning was purporting to usurp the common law principle in Bell v. Lever Brothers and replace it with a more flexible principle of equity, or the equitable remedy of rescission that he identified is one that operates in a situation where the mistake is not of such a nature as to avoid the contract. Decisions have, hitherto, proceeded on the basis that the latter is the true position. Thus, in Japanese Bank v. Credit du Nord Steyn J. remarked at p.266 that it was clear that mistake in equity was not circumscribed by common law definitions.

Common mistake in equity prior to Bell v. Lever Brothers

99. The doctrine of common mistake at common law which we have identified cannot be said to have been firmly established prior to Bell v. Lever Brothers – see the comments of the High Court in McRae and of the authors of Meagher on Equity:

Doctrines & Remedies 3rd Ed. at p.372. Little wonder if litigants, confronted with what appeared to them to be agreements binding in law should invoke the equitable jurisdiction of the Court of Chancery in an attempt to be released from their obligations, when they considered justice so demanded. Nor is it surprising if the Chancery Court granted the relief sought on the basis upon which it was claimed. It is not realistic to infer that when such relief was granted, the court implicitly determined that the contract was binding in law.

Cooper v. Phibbs ( 1867) LR 2 HL 149

While a number of 18th and 19th century cases prior to the decision in Cooper v. Phibbs ( 1867) LR 2 HL 149 lend some support to the thesis that equity had taken that step, "no coherent equitable doctrine of mistake can be spelt from them" – see the discussion in Goff & Jones on the Law of Restitution, 5th ed. at pp.288-9 and Meagher at pp.375-6. Cooper v. Phibbs was however the decision primarily relied upon by Denning LJ in Solle v. Butcher – he described it as "the great case", and it is necessary to consider it with care. In this task we have been assisted by the analysis in "A Note on Cooper v. Phibbs" by Mr Paul Matthews in 105 LQR at 599 which was informed by access to the record of proceedings in the House of Lords.

101. At the heart of the case was a dispute as to title to a fishery in Ireland. The fishery, together with a cottage, was the subject of an agreement for a three year lease entered into by Phibbs, the respondent with Cooper the appellant. Phibbs was acting as agent for five sisters, who believed that they had inherited the fishery from their father. He, in the belief that he was the owner of the fishery in fee simple, had expended much money in improving it. Cooper contended that, after entering into the lease, he had discovered that the fishery had at all material times been trust property and that, in consequence of a series of events of very great complexity, he was entitled to an equitable life interest. It was ultimately not disputed, however, that the head lease of the cottage was vested in the sisters.

102. Cooper petitioned the Court of Chancery in Ireland seeking an order that the agreement be delivered up to be cancelled and that Phibbs be restrained from suing upon it. Cooper at all times made it plain that he was prepared to submit to any terms which the court might impose. The Lord Chancellor of Ireland dismissed the petition, without prejudice to the question as to ownership of the fishery, holding that no ground for the grant of relief had been made out. Cooper appealed, contending that the agreement ought to be set aside as made under mistake of fact and that he should be declared to have title to the fishery.

103. The House of Lords resolved the issue of title in favour of Cooper.

As Lord Westbury puts it in Cooper v. Phibbs : "If parties contract under a mutual mistake and misapprehension as to their relative and respective rights, the result is, that that agreement is liable to be set aside as having proceeded upon a common mistake." Later authorities show that the language should be "is void" and any revival is made, not by electing not to set aside, but by a new contract."

The only criticism to be made on that statement of the rule is that the word "void" ought to have been substituted for the expression "liable to be set aside", as what really happens in such cases is that the agreement fails to become a contract.

116. Lord Atkin at p.218 cited Cooper v. Phibbs as an example of mistake as to the subject matter of the contract:

This is the case of Cooper v. Phibbs, where A agreed to take a lease of a fishery from B, though contrary to the belief of both parties at the time A was tenant for life of the fishery and B appears to have had no title at all. To such a case Lord Westbury applied the principle that if parties contract under a mutual mistake and misapprehension as to their relative and respective rights the result is that the agreement is liable to be set aside as having proceeded upon a common mistake. Applied to the context the statement is only subject to the criticism that the agreement would appear to be void rather than voidable.

118. These passages demonstrate that the House of Lords in Bell v. Lever Brothers considered that the intervention of equity, as demonstrated in Cooper v. Phibbs, took place in circumstances where the common law would have ruled the contract void for mistake. We do not find it conceivable that the House of Lords overlooked an equitable right in Lever Brothers to rescind the agreement, notwithstanding that the agreement was not void for mistake at common law.

The effect of Solle v. Butcher

119. The material facts of Solle v. Butcher can shortly be summarised as follows. The defendant agreed to let a flat to the plaintiff for £250 a year. The flat had previously been let at a rent of £140. Substantial work had been done on the flat and both parties believed that this so altered the nature of the premises as to free them from relevant rent control. In this they were mistaken. The defendant would have been able to charge the plaintiff an increased rent of £250 to reflect the work done on the flat had he complied with the requisite formalities but, under the influence of the mistake, he failed to do so. In the result he could not lawfully charge a rent higher than £140. The plaintiff obtained a declaration in the county court that the rent was restricted to £140 and an order for repayment of rent overpaid. The Judge rejected the contention that the contract had been concluded under a common mistake of fact, holding that the mistake was one of law.

120. The Court of Appeal, by a majority, reversed this decision. Bucknill LJ held that the parties had concluded the agreement under a common mistake of fact, namely that the alterations had turned the premises into "in effect, a different flat". He held that this common mistake was on a matter of fundamental importance and that the defendant was entitled to rescind the agreement under the principle in Cooper v. Phibbs (1867) LR 2 HL 249. He remarked that he had read the judgment of Denning LJ and agreed with the terms proposed by him on which the lease should be set aside.

121. Jenkins LJ dissented. He held that the common mistake was one of law, namely whether or not the flat was subject to rent control. He held that no right to rescind could be based on an error of law.

125. Denning LJ held that the lease should be set aside because there had been "a common misapprehension, which was fundamental". The terms on which the lease was set aside were such as, in effect, to give the tenant the option of substituting the lease for one at the full rent which the law permitted.

126. Toulson J. described this decision by Lord Denning as one which "sought to outflank Bell v. Lever Brothers". We think that this was fair comment. It was not realistic to treat the House of Lords in Bell v. Lever Brothers as oblivious to principles of equity, nor to suggest that "if it had been considered on equitable grounds the result might have been different". For the reasons that we have given, we do not consider that Cooper v. Phibbs demonstrated or established an equitable jurisdiction to grant rescission for common mistake in circumstances that fell short of those in which the common law held a contract void. Insofar as this was in doubt, the House of Lords in Bell v. Lever Brothers delimited the ambit of operation of Cooper v. Phibbs by holding, rightly or wrongly, that on the facts of that case the agreement in question was void at law and by holding that, on the facts in Bell v. Lever Brothers, the mistake had not had the effect of rendering the contract void.

Chitty on Contracts, 26th ed. (1989), vol. 1, para. 401; Treitel, The Law of Contract, 8th ed. (1991), p.276; and Cheshire, Fifoot and Furmston's Law of Contract, 11th ed. (1991), p.245. The difference may be that the common law rule is limited to mistakes with regard to the subject matter of the contract, whilst equity can have regard to a wider and perhaps unlimited category of "fundamental" mistake.

Summary (Great Peace Case)

153. A number of cases, albeit a small number, in the course of the last 50 years have purported to follow Solle v. Butcher, yet none of them defines the test of mistake that gives rise to the equitable jurisdiction to rescind in a manner that distinguishes this from the test of a mistake that renders a contract void in law, as identified in Bell v. Lever Brothers. This is, perhaps, not surprising, for Lord Denning, the author of the test in Solle v. Butcher, set Bell v. Lever Brothers at nought. It is possible to reconcile Solle v. Butcher and Magee v. Pennine Insurance with Bell v. Lever Brothers only by postulating that there are two categories of mistake, one that renders a contract void at law and one that renders it voidable in equity. Although later cases have proceeded on this basis, it is not possible to identify that proposition in the judgment of any of the three Lords Justices, Denning, Bucknill or Fenton Atkinson, who participated in the majority decisions in the former two cases. Nor, over 50 years, has it proved possible to define satisfactorily two different qualities of mistake, one operating in law and one in equity.

155. A common factor in Solle v. Butcher and the cases which have followed it can be identified. The effect of the mistake has been to make the contract a particularly bad bargain for one of the parties. Is there a principle of equity which justifies the court in rescinding a contract where a common mistake has produced this result?

156. "Equity is ... a body of rules or principles which form an appendage to the general rules of law, or a gloss upon them. In origin at least, it represents the attempt of the English legal system to meet a problem which confronts all legal systems reaching a certain stage of development. In order to ensure the smooth running of society it is necessary to formulate general rules which work well enough in the majority of cases. Sooner or later, however, cases arise in which, in some unforeseen set of facts, the general rules produce substantial unfairness ..." (Snell's Equity, 30th edn. Paragraph 1-03)

157. Thus the premise of equity's intrusion into the effects of the common law is that the common law rule in question is seen in the particular case to work injustice, and for some reason the common law cannot cure itself. But it is difficult to see how that can apply here. Cases of fraud and misrepresentation, and undue influence, are all catered for under other existing and uncontentious equitable rules. We are only concerned with the question whether relief might be given for common mistake in circumstances wider than those stipulated in Bell v. Lever Brothers . But that, surely, is a question as to where the common law should draw the line; not whether, given the common law rule, it needs to be mitigated by application of some other doctrine. The common law has drawn the line in Bell v. Lever Brothers. The effect of Solle v. Butcher is not to supplement or mitigate the common law; it is to say that Bell v. Lever Brothers was wrongly decided.

158. Our conclusion is that it is impossible to reconcile Solle v. Butcher with Bell v. Lever Brothers. 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. In paragraphs 110 to 121 of his judgment, Toulson J. has demonstrated the extent of that confusion. 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. That is the conclusion of Toulson J. Do the principles of case precedent permit us to endorse it? What is the correct approach where this court concludes that a decision of the Court of Appeal cannot stand with an earlier decision of the House of Lords? There are two decisions which bear on this question.

What a court should do when faced with a decision of the Court of Appeal manifestly inconsistent with the decisions of this House is a problem of some difficulty in the doctrine of precedent. I incline to think it should apply the law laid down by the House and refuse to follow the erroneous decision.

161. We have been in some doubt as to whether this line of authority goes far enough to permit us to hold that Solle v. Butcher is not good law. We are very conscious that we are not only scrutinising the reasoning of Lord Denning in Solle v. Butcher and in Magee v. Pennine Insurance Co, but are also faced with a number of later decisions in which Lord Denning's approach has been approved and followed. Further, a Division of this Court has made it clear in West Sussex Properties Ltd v. Chichester DC that they felt bound by Solle's case. However, it is to be noticed that while junior counsel in the court below in West Sussex had sought to challenge the correctness of Solle, in the Court of Appeal leading counsel accepted that it was good law unless and until overturned by their Lordships' House. In this case we have heard full argument, which has provided what we believe has been the first opportunity in this court for a full and mature consideration of the relation between Bell v. Lever Brothers Ltd and Solle v. Butcher. In the light of that consideration we can see no way that Solle v. Butcher can stand with Bell v. Lever Brothers. In these circumstances we can see no option but so to hold.

162. We can understand why the decision in Bell v. Lever Brothers Ltd did not find favour with Lord Denning. An equitable jurisdiction to grant rescission on terms where a common fundamental mistake has induced a contract gives greater flexibility than a doctrine of common law which holds the contract void in such circumstances. Just as the Law Reform (Frustrated Contracts) Act 1943 was needed to temper the effect of the common law doctrine of frustration, so there is scope for legislation to give greater flexibility to our law of mistake than the common law allows.

166. Next Mr Reeder submitted that it was not legitimate for the Judge to have regard to the fact that the appellants did not want to cancel the agreement with the "Great Peace" until they knew whether they could get a nearer vessel to assist. We do not agree. This reaction was a telling indication that the fact that the vessels were considerably further apart than the appellants 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 appellants 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.

167. The parties entered into a binding contract for the hire of the "Great Peace". That contract gave the appellants an express right to cancel the contract subject to the obligation to pay the "cancellation fee" of 5 days hire. When they engaged the "Nordfarer" they cancelled the "Great Peace". They became liable in consequence to pay the cancellation fee. There is no injustice in this result.

168. For the reasons that we have given, we would dismiss this appeal.

Order: Appeal dismissed with costs to be assessed on an indemnity basis. Agreed sum of £45,000 to be paid on account of costs. Counsel to prepare agreed minute of order.


MISTAKES

1. RES EXTINCTA – where the subject matter no more exist
2. RES SUA - where the things already belong to the buyer
3. MISTAKE AS TO IDENTITY or ATTRIBUTE
4. COMMON MISTAKE
5. MUTUAL MISTAKE

NON EST FACTUM – this is not my deed

1. RES EXTINCTA

Couterier v Hastie
Fact: Shipment of corn; did not exist anymore
Held: Total failure of consideration. Contract Void.

McRae v Commonwealth Disposal Commission
Fact: No oil tanker.
Held: S. 6 of Sales of Goods Act 1979 states: where parties have entered into a contract for specific goods which have perished, the contract is rendered void.

2. RES SUA

Cooper v Phibbs
Facts: Purchase a fishery which he already owns. Contract void.

3. MISTAKE AS TO IDENTITY OF PERSON

Cundy v Lindsey
Facts: Sales of handkerchief on credit.
Held: If mistake is to identity, contract is void. If mistake is to attribute, contract valid.

King’s Norton Metal v Edridge Merret
Held: Mistake as to attribute. Contract valid.

Where dealing face to face:

Phillips v Brooks (Attribute)
Facts: Bought jewellery - paid by cheque - dishonoured – buyer claimed he was someone.
Held: Mistake as to attribute. Contract valid.

Lewis v Avery (Attribute)
Facts: Bought items – claim to be an actor – pay with cheques – dishonoured.
Held: Mistake as to attribute. Contract valid.

Lake v Simmonds (Identity)
Facts: Bought jewellery – wanted to show to husband who was regular customer – a mistress.
Held: Mistake as to identity. Contract void.


Ingram v Little (Identity)

Fact: buy a car – claimed to be Hutchinson – paid by cheque – dishonoured – seller checked buyer’s credibility.
Held: Mistake as to identity. Contract void.


4. COMMON MISTAKE

Shogun Finance v Hudson (HL) (Identity)
Fact: Stole B. Pattel’s driving licence – took a car loan – then sold the car.
Held: Mistake as to identity.

Bell & Smelling v Lever Bros. (Quality)
Common mistake must relate to something which both parties must necessarily have accepted in their minds as an essential element of the subject matter.

Galloway v Galloway (Quality)
Fact: he thought wife died – married another – later found wife still alive – refused to pay 2nd wife compensation.
Held: Fundamental mistake; contract void.

Scott v Coulson (res estincta)
Fact: The insured has died before a contract for life insurance was bought in his name.
Held: The subject matter no more exist. Contract void.

Harrison v Bunten (Quality)
Fact: Bought kapuk & get inferior product.
Held: not a fundamental mistake as to quality.

Oscar Chess v Williams
Fact: car sold as 1948 Model but was 1939 Model.
Held: No mistake – not sufficiently fundamental to avoid contract.

Great Peace Shipping v Tsarliris
Equity should not exist on common mistakes and the decision should be based on the principles of Bell v Lever Bros.
Overruled Solle v Butcher, Grist v Bailey, Magee v Pennine Insurance

5. MUTUAL MISTAKE

Where parties had intended to contract on different terms.

Raffles v Wichelhaus
Fact: cotton was to be shipped by ‘Peerless’ from Bombay. Unknown to both, there was 2 ship named Peerless.
Held: No consensus ad idem. Contract void.

Smith v Hughes
Fact: Smith was not at obligation to tell Hughes that the oats are new. Contract valid.

2 comments:

Elmina Kenley said...

Its really very informative post.i have also few knowledge about Law Essay

Nancy Aguilar said...

A common mistake occurs when both parties are mistaken about the same thing (eg, the authenticity of a piece of art); it is very rare for a common mistake to give rise to remedies at common law, although in equity remedies of rescission or rectification will sometimes be available. Law Paper Writers