Saturday, August 06, 2005

Contract Law - Undue Influence

The equitable doctrine of undue influence typically provides relief from contract entered into under improper pressure not amounting to duress. It applies to cases where a claimant seeks to set aside a transaction based on the fact that the defendant had exercise undue influence to procure the transaction which is patently and strikingly unfavorable to the claimant. The courts will be willing to intervene where there is some relationship between parties which has been exploited and abused to gain an unfair advantage.

Sir John Salmond gave a useful pointer in Brusewitz v Brown [1923] NZLR 1106 at page 1109:

“The law in general leaves every man at liberty to make such bargains as he pleases, and to dispose of his own property as he chooses. However improvident, unreasonable, or unjust such bargains or dispositions may be, they are binding on every party to them unless he can prove affirmatively the existence of one of the recognized invalidating circumstances, such as fraud or undue influence.”

Equitable doctrines of undue influence

In recent development of equitable doctrine of undue influence in English law, there has been the tendency to categorize the different types of cases by reference to the precise relationship between the parties or the special situation of the weaker party. In Royal Bank of Scotland v Etridge1, a transaction can be set aside in equity if, because it had been procured by undue influence exerted by one party (A) on the other (B), where it cannot “fairly be treated as the expression of (B’s) free will.” Reliefs sought under undue influence are group into two categories:

1. Actual Pressure
2. Special Relationship

Actual Pressure

This refers to cases where there is no special relationship that exists between the contracting parties. Relief is given based on the ground of undue influence in which one party had induced the other to enter into the transaction by actual pressure which equity regard as improper but which does not amount to duress at common law because no element of violence to the person was involved. In this situation, it must be affirmatively proved that one party in fact exerted undue influence over the other and that the transaction resulted from that influence. For example, a promise to pay money can be set aside if obtained by a threat to prosecute the promisor or his close relative or his spouse for a criminal offence2. Undue influence can be exercised without making illegitimate threats or indeed any threats at all3. The party who claims relief on the ground of actual undue influence must show that such influence existed and had been exercised, and that the transaction resulted from that influence.

Special Relationship

This category refers to a special relationship that exists between the parties to the contract. Equity would also give relief for undue influence in which the relationship between the parties is such as to give rise to what has been called a “presumption of undue influence”4. Here, the equitable view is that undue influence must be presumed, that is, the undue influence may be presumed to exist or that it is presumed to have been exercised. Where the presumption applies, it is not necessary for the party claiming relief to show that the impugned transaction was in fact procured by undue influence. Relief can be given on the ground of undue influence even though the person to whom the promise was made obtained no personal benefit from it. A presumption is a rule of law by which, on proof of a specified fact or facts is taken to exist. Once that confidential relationship has been proved, the burden then shifts to the wrongdoer to prove that the claimant had actually entered into the contract based on his free exercise of independent will. The most usual way is to show that the claimant had received independent competent advice before entering into the transaction. Presumptions can be classified into two groups – irrebuttable presumption and rebuttable presumption. Irrebuttable presumption (or sometimes referred as conclusive presumption) are rules of substantive law which have nothing to do with ways of proving facts5. If the law says that, on proof of the basic fact, the presumed fact is irrebuttably taken to exist. A rebuttable presumption, by contrast, is a rule of law which, on proof of the basic fact (s), the presumed fact is assumed to exist in the absence of evidence negativing its existence. Such presumption may be those which requires the person against whom the presumption operates to show (on a balance of probabilities) that the presumed fact does not exist; and those which merely require that person to introduce some evidence to that effect, leaving it up to the proponent of the presumption to show that (on a balance of probabilities) that fact does, exist (often referred as evidential presumption).

To give rise to the “presumption of undue influence”, two basic facts must be established by the party claiming relief. The first is the existence of a relationship between (A) and (B) by virtue of which (B) either in fact reposed trust and confidence in (A), or is taken as a matter of law to have done so. The second fact relates to the nature of the impugned transactions. Once a relationship of trust and confidence is established, the transaction could be set aside on grounds of public policy, even though it was not in fact disadvantages to him. Where (A) stood in a fiduciary position to (B), the impugned transaction would not be allowed to stand and there will be no requirement to proof any form of “manifested disadvantage”.

Relationship presumption

Traditionally, the relationship in which the presumption applies is classified into two categories which became known as “class 2A” (where relationship is based on presumed trust and confidence) and “class 2B” (where relationships are based on actual confidence).

In the class 2A case refers to the existence of a relationship of trust and confidence between the wrongdoer and the claimant of such a nature that it is fair to presume that the wrongdoer abused that relationship in procuring the claimant to enter into the impugned transaction. The law presumes irrebuttably, that (A) had influence over (B) if their relationship is that of parent and child6, guardian and ward7, religious advisors and disciples8, doctor and patient9, solicitor and client10, and trustee and cestui que trust11. It does not apply to all relationships which are fiduciary in the sense that they give rise to a duty of disclosure. Examples are: husband and wife12, employer and employee13 & agent and principle14. The nature of the fiduciary relation must be such that it justifies interference. The presumption may apply even after the relationship has ceased if the influence continues, for example, between a solicitor and ex-client.

In the class 2B case, the claimant needs to prove a de facto existence of a relationship under which the claimant generally reposed trust and confidence in the wrongdoer, which will raise the presumption of undue influence that the wrongdoer has then to rebut. As long as the claimant succeeds by merely proving that he reposed trust and confidence in the wrongdoer, he need not have to prove that the wrongdoer had exerted actual undue influence. Thus, the relationship between (A) and (B) must be one in which (B) has in fact reposed trust and confidence in (A). It is necessary for (B) to establish this fact or that (A) has had acquired “domination” over (B).

In each such case, the main question that would be considered by the court would be whether the party seeking to set the transaction aside has reposed sufficient trust and confidence in the other.

Burden of prove

Where the necessary relationship is alleged to exist, the burden of proving that it does exist is on the party seeking to set aside the transaction15. Once this burden has been discharged, it is up to the party benefiting from the transaction to rebut the presumption of undue influence. The normal remedy in cases of undue influence is to set the impugned transaction aside. The court may make an award in the nature of damages giving the victim the difference between the amounts for which he parted with the subject matter and its fair value at the time of the transaction.


The presumption of undue influence is rebutted if the party benefiting from the transaction shows that it was “the free exercise of independent will”. The usual way of doing this is to show that the other party had received independent advice before entering into the transaction. The independent advice must be given by a competent person and based on knowledge of all the relevant facts16.


The ratio decidendi in the case of undue influence is far from clear, but perhaps fair interpretation of the judgment is that the presumption will not arise unless the transaction is patently and strikingly unfavorable to the party who seeks its avoidance. The primary principle of equity was, and is, and is always more flexible in the way it grants or refuses relief. Equity has always acted in accordance to the principles of good consciousness.

Equity & Trust Law

Doctrines of Equity & Trust

Equity is a body of rules or principles developed in the Court of Chancery before 1873. The doctrines of equity developed as a response to defects in the English common law system, defects which had resulted in rigidity and inflexibility. A knowledge of the principles of equity is therefore crucial to a complete understanding of the law in those areas of private law, particularly property and contract, where equity intervened to modify the operation of the rules of the common law. In that sense, the doctrines of equity form part of the law of contract and property.

The doctrine has also reached into other subject areas including taxation law, corporate law and succession. Equity also developed remedies, such as the injunction, which were unknown to the common law and which have a continuing influence in public law as well as private law.

Future trends and developments in equity

Author: Tina Cockburn and Melinda Shirley

The body of law called equity is founded upon the principles of fairness and conscience. Its piecemeal development took place over many years as a direct result of the injustices often caused by a strict application of the common law. As a result, equitable principles have also developed in a piecemeal and responsive way.

The principles of equity are founded on the concept of 'unconscionability' that is, where an act or omission is considered to be contrary to good conscience. In those circumstances equity will often step in and grant relief to a party whose trust has been breached or whose disadvantage has been used to the advantage of another.

Equitable remedies are both flexible and specific to the circumstances of each case and the granting of equitable relief is always discretionary. An understanding of the history and development of equity is fundamental to an understanding of this area of the law.

As equity became systematised in the 19th century, it began to attract criticism for being rigid and fixed. In much the same way as the common law it sought to enhance, it was criticised as having ceased to be responsive to the changing needs of society and for having become bound up in too many technical rules to perform its traditional role.

Indeed many modern judges have shown a reluctance to develop new equitable principles and both the House of Lords and the High Court have expressed the view that the development of equity should only occur through the legitimate processes of legal reasoning. In Muschinski v Dodds (1986) 160 CLR 583 at 615 Deane J stated that:

"the fact that the constructive trust remains predominantly remedial does not, however, mean that it represents a medium for the indulgence of idiosyncratic notions of fairness and justice".

Nor however, could equity be described as static. Through legitimate legal reasoning the High Court has demonstrated a willingness to apply established principles to a number of new situations in a socially responsive and often progressive way, the areas of constructive trusts, estoppel and mareva injunctions being good examples.

In Garcia v National Australia Bank (1998) 72 ALJR 1243, Kirby J (at 1251) makes reference to the way that equitable doctrines are refined by the High Court to ensure that they keep pace with societal change:

"somehow, by some means, there is a movement that takes place in the exposition of legal principle. The movement may be readily perceived at a distance. Yet, although we may sometimes be unable to say how the law gets from one point to another, no one doubts that movement occurs or that it is "in response to the developments of the society in which [the law] rules. Gummow has pointed out that the principles and doctrines of equity never pretended "like the rules of the Common Law?to have been established from time immemorial". Rather, they were "established from time to time - altered, improved, and refined from time to time". So it is in this case."

And later (at 1264) he says:

"equitable principles are themselves in a constant state of evolution in response to the developments of society. Borrowing against the family home to support a business venture is one such development which was not prevalent in earlier times. The changing nature of domestic relationships is another such development. Equitable doctrine is perfectly capable of adjustment to such changes. It does not need to use outmoded concepts, or anachronistic language, which pretend that things have remained the same as they were in 1939 when Yerkey (v Jones) was decided.

The function of trusts

Author: Howard K Insall and Gino Dal Pont

There are many reasons for creating express trusts, but essentially, persons create trusts because of the advantages which result from having their property owned by a third party who may be independent but nevertheless is subject to some sort of control by the person creating the trust.

Thus persons often create testamentary trusts because it enables them to control what happens to their property after their death. For example, a testator may not want his or her property to be subject to a simple division on his or her death (for example, half to the testator's spouse, a quarter to each of the testator's two children). The testator can exercise far more control over the property if, by his or her will, trustees are appointed and the property is given to them on trust to pay the income from the property to the testator's spouse for life, and on the spouse's death, to transfer the property to the two children. A testator's children may be very young when he or she dies and the use of a trust enables the testator to secure their future by delaying the transfer of property to them until their adulthood.

Trusts, especially inter vivos trusts, may have taxation advantages for the creator. A person (the settlor) may transfer his or property to a trustee so that income from that property is divided between named beneficiaries who may be in a lower tax bracket than the settlor. Although the settlor may no longer earn the income from that property, in setting up the trust, he or she can determine who is to receive the benefit of the property and income.

Trusts also have benefits in insolvency law. These stem principally from the insolvency law principle that property held by a person as trustee is not available to be distributed amongst his or her creditors on that person's bankruptcy. In other words, a person's creditors cannot claim property held by that person on trust in order to satisfy their claims, but only property that he or she holds beneficially.

In Australia trusts are also used as vehicles through which the provision of superannuation are structured. The principal use of the trust in this context is to provide an additional protective measure on funds that are earmarked to provide the retirement income of millions of people. The interrelationship between statute and the general law of trusts is illustrated by the Superannuation Industry (Supervision) Act 1993 (Cth), which, amongst other things, imposes additional duties on superannuation fund trustees.

Contract Law - Breach of Contract & Misrepresentation


If any party to a contract fails to stick to its part of the bargain, there is a breach. A breach of contract occurs when:

  1. One party to a contract makes it impossible for the other parties to the contract to perform;
  2. A party to the contract does something against the intent of the contract; or
  3. A party absolutely refuses to perform the contract.

Not all breaches of contract are necessarily "contract killers" which would end up in a lawsuit. Much would depend on whether the breach is "material" or "immaterial" and who the parties are. What makes sense for you will depend on the facts. Where the matter is substantial, the advice of an attorney can help you.

Standard Forms of Contract may have its provisions as to the measure of damages in the event of a breach, such as determination of the contract, liquidated damages for delay in completion and the direct loss and/or expenses.

In the event of abandonment of contract or a total failure to complete performance, the promisee can elect to determine the contract. In the event of delay in completion due to inexcusable reasons, any liquidated ascertained damages specified in the contract will be treated as an promisee’s pre-estimate of all his damages arising from delay in completion.

In the case of defective works, the measure of damages recoverable by the promisee is the difference between the contract price of the work and the cost of making good in conformance to the contract.

General Damages

Any breach of contract will give the aggrieved party a right to damages at common law, unless expressly agreed (e.g. a liquidated damages clause).

The general rule on recoverability of damages will be what the other party ought to receive in respect of such breach of contract should be such as may fairly and reasonably be considered as either arising naturally or such as may reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract, as the probable result of the breach of it [see: Hadley v. Baxendale 1854 & Victoria Laundry (Windsor) Ltd. V. Newman Industries Ltd. 1949].

In principle, most loss, which flows as a consequence from the breach, is recoverable unless it is not considered to have been within the reasonable contemplation of the parties.

It must be emphasized that the purpose of an award of damages is to put the plaintiff in the position he would have been had the breach of contract or duty not occurred.

So far as money is concerned, the party that sustains a loss by reason of a breach of contract is to be placed in the same situation as if the contract had been performed.

The key factor in an action for general damages is the need to be able to support the claim with evidence of the loss suffered as a result of the breach. Vague allegations of loss suffered are unlikely to be recognized in law.

As for the interest charges, in the absence of a contractual agreement to pay interest, it may not be payable.

Financial charges are recoverable under usual contractual provisions (e.g. under Direct Loss and/or Expense claim).


For breach of contract, the innocent party is entitled to terminate the contract if the breach is a breach of condition. For breach of warranty, he is only entitled to damages. For breach of an innominate term, he is only entitled to termination if that breach is so serious as to deprive him of substantially the whole benefit of the contract. The contract is not automatically terminated by the breach; the innocent party must indicate his acceptance of the breach and then he can rescind the contract. Otherwise, he will be taken to have affirmed the contract, and his obligation under it will continue (see: Photo production Ltd v Securicor Transport Ltd). Termination for breach discharges the innocent party from any further performance, and the contract will then be brought to an end prospectively.

A misrepresentation is a statement of fact made by one party to the contract to the other, which induces the other party to enter into the contract which is less advantages to him. In order to determine whether the statement made amounts to misrepresentation, they must be:

  1. a statement of facts, not of opinion, intention or law
  2. the statement was addressed to the innocent party, and that
  3. it did induced the party to enter into the contract which is less beneficial to him.

Half-truth are also amounts to misrepresentation (Dimmock v Hallet).

As for misrepresentation, the remedy of rescission may be available to the innocent party.

The bars to rescission are: affirmation of contract, impossibility of restitution, and third party rights or delay.

Rescission sets the contract aside both retrospectively and prospectively, that is, the parties are put in the position, as far as possible, to where they were in before they entered into the contract.

Rescission may be available whether the misrepresentation is fraudulent, negligent (under s. 2(1) Misrepresentation Act 1967) or wholly innocent (s. 2(2) Misrepresentation Act 1967). Under s. 2(2) MA, the court could award damages in lieu of rescission.

For a breach of warranty, only damages would be available. For misrepresentation, s. 1 of MA 1967 provides that, if the innocent party would have been entitled to rescind the contract, he shall be so entitled notwithstanding that the misrepresentation has become a term of the contract. Thus, if the term, even when the term of the misrepresentation is only regarded as a warranty, the right to rescind remains.

The governing purpose of an award of damages for breach of contract is to put the plaintiff in the same position, as far as money can do so, as if the contract had been performed (Robinson v Harman). The limitation to this is when the damages are too remote in which case, the contract breaker will only be liable for loss that was in the reasonable contemplation of the parties (Hadley v Baxendale).

The right to damages for misrepresentation depends on the nature of the misrepresentation. If it is fraudulent, the remedy is in the tort of deceit, and the measure of damages is tortuous, which is to put the plaintiff in the he would have been in if the statement had not been made. Thus, there would not be entitlement to expectation loss.

In contrast, for contractual measure, the damages for fraud are that the defendant is bound to make reparation for all the actual damages directly flowing from the fraudulent inducement – the expectation loss (see: Doyle v Olby). A striking example of the application of this rule is the case of Smith New Court Securities Ltd v Scrimgeour Vickers where the defendants were held liable for a fall in the value of the shares which is unconnected with the fraud.

Fraud may be difficult to prove. But even if the misrepresentation was not fraudulent, the defendant may incur liability for misrepresentation under s. 2(1) MA 1967 which has the effect of imposing liability for negligent misrepresentation. Applying this section, the CA had held that the measure of damages under s. 2(1) MA is the same as for fraud, that is, the reliance measure, and not expectation measure (Royscott Trust v Rogerson). To avoid such liability, the defendant has the burden to prove that he had reasonable grounds to believe and did believe up to the time the contract was made that the facts represented were true. If the defendant succeeds, then he will only be liable for an indemnity (Whittington v Scale Hayne).

Contract Law - Common 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.


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.


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


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.


1. RES EXTINCTA – where the subject matter no more exist
2. RES SUA - where the things already belong to the buyer

NON EST FACTUM – this is not my deed


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.


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


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.


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


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.

Contract Law - Doctrine of Frustration


Frustrated contract – automatic discharged.

Types of frustrated contracts:

1. Impossible contract: Taylor v Caldwell (1863) Lord Blackburn

Concert was impossible to be held because building was burnt down.

2. Unavailable for performance:

Condor v Barron Knights; Robinson v Davison: Contract for personal performance frustrated because illness made it impossible to perform.

3. Method of performance impossible:

Nickoll & Knight v Ashton Edridge: Sales of cottonseed; specified to be shipped by steamship Orlando from Alexandria in January. Orlando was grounded and could not make the journey. Held: that the contract requiring performance in a stipulated manner had been frustrated.

Tsarkiroglou v Noblee Thorl: Suez canal closed. Journey can continue with a much longer route. Performance had only become onerous or more expensive; performance still possible; manner of performance not specified. Contract not frustrated.

Davis Contractor v Fareham UDC: Labor shortage caused delay and cost more. Held: that the risk events can reasonably be expected to occur. Circumstances did not make performance radically different from what was expected. Performance only become more burdensome and did not change the nature of what was expected to do. Contract not frustrated.

4. Supervening event illegal: Fibrosa Case: War was declared and port was occupied by enemy. Illegal to trade with enemy.

5. Performance made pointless:

Krell v Henry (1903)

Rented suite room to watch coronation procession. Price of room reflected the significant event. Coronation was called off due to king’s illness. Held: that the procession was the foundation of the contract and event renders the contract incapable of performance due to non-existence of express condition which goes to the root of the contract which is essential to its performance. Contract was frustrated.

Herne Bay Steam Boat v Hutton (1903)

Hired steamboat to watch naval review during the King’s coronation day. Held: that inability to watch naval review during coronation was not fundamental to the contract as pleasure trip still possible. Contract is not frustrated.

6. Self-induced frustration: St. Cuthbert Case

Both parties aware that ship requires a licence from government before it can be legally operated. Charterer had a choice but decided not to use one of the available licences for Cuthbert.

The Super Servant Two (1990)

Contract to carry drilling rig in one of the two vessels owned. SS II sanked and D claimed contract frustrated. Held: D had chosen to use SS I on another contract as SS I contract was made after SS II. D negotiated extra payment to use SS I. This indicates that D attempted to use frustration to avoid an agreement which had become inconvenient.

7. Where one party had made what turns out to be a bad deal: Amalgamated Investment and Property v John Walker (1977)

Redevelopment became difficult and impossible. Held: that it did not mean that there was no purpose at all to the contract. It only had become not so lucrative as expected. Contract not frustrated.

Time of Frustrating Event

Event must occur after contract had been made. If event occurs before contract made, then it is Mistake.

Theory of Frustration – Common Law

Traditional View – any loss resulting from frustration should lie where it fell. If advance payment made before frustrating event, it will not be recoverable.

Fibrosa Case – court enunciated that advance payment could be recovered if there is a total failure of consideration. Advance payment will not be able to be recovered if the other party had received some benefits (‘All-or-Nothing Approach’). Criticism: receiving little benefit but lose all money paid. Total failure of consideration would allow recover-back which in some circumstances can be unfair to payee.

Camerco v ICM/Fair Warning (1995) – Court concluded that there ‘is no indication in the Act or relevant literature that the Court is obliged to incline towards total retention or equal division. The task of the judiciary is to do justice in a situation where neither parties contemplated, nor provided for, and to mitigate the possible harshness of allowing all loss to ‘lie where it had fallen’.

Law Revision Committee 1939 Report

Reported that the Act was based on the fact that contracting parties who did not negotiate for advance payment would be voluntarily assuming the risk of loss.

Criticism: Since frustration concerns events which cannot be foreseen, it is hard to see how contracting parties could consciously assume the risk that the risk events might happen.

Theoretical Basis for Doctrine of Frustration

Two school of thoughts (1) Implied Term Theory, & (2) Imposed Term Theory

Implied Term Theory: suggest that contract is discharged because, by implication, the parties have agreed that it will no longer be binding if the frustration event occurs. This approach was adopted by Blackburn J in Taylor v Caldwell.

Imposed Term Theory: approach adopted in Gamerco SA v ICM?Fair Warning (Agency) where the court is to do justice in a situation where neither parties contemplated, nor provide for, and to mitigate the possible harshness of the ‘all-or-nothing’ maxim.

Criticism: most commentators wish to see the court as intervening to impose a fair solution where circumstances make the whole situation completely different.

Law Reform (Frustrated Contracts) Act 1943

s.1(1): where a contract…becomes impossible of performance …and the parties been discharged from the further performance of the contract, …the following provisions shall apply:

s.1(2): All sums paid shall be recoverable and all sums payable shall ceased to be so payable. Court may allow the party who had received the money to deduct direct expenses incurred.

s.1(3): The other party is entitled to claim a just sum if the payee had enjoyed a valuable benefit. Court would consider the direct expenses incurred, and the effect, in relation to the said benefit..

At the time of Bell v. Lever Brothers the law of frustration and common mistake had advanced hand in hand on the foundation of a common principle. Thereafter frustration proved a more fertile ground for the development of this principle than common mistake, and consideration of the development of the law of frustration assists with the analysis of the law of common mistake.

The foundation of the law of frustration was Blackburn J's famous judgment in Taylor v. Caldwell (1863) 3 B.& S. 826. The parties had entered into an agreement for the hire of a music-hall for concerts on four specified nights. The hall burnt down before the first of these. Blackburn J., giving the judgment of the Court of Queen's Bench held that performance of the contract was excused by reason of an implied term:
as subject to an implied condition that the parties shall be excused in case, before breach, performance becomes impossible from the perishing of the thing, without default of the contractor ... The principle seems to us to be that, in contracts in which the performance depends on the continued existence of a given person or thing, a condition is implied that the impossibility of performance arising from the perishing of the person or thing shall excuse the performance. In none of these cases is the promise other than positive, nor is there any express stipulation that the destruction of the person or thing shall excuse the performance; but that excuse is by law implied, because from the nature of the contract it is apparent that the parties contracted on the basis of the continued existence of the particular person or chattel."

Taylor v. Caldwell was a case in which the subject matter of the contract was destroyed, so that performance of the letter of the contract was rendered impossible. The principle of frustration thus established, its ambit of operation was then extended. Claims for frustration were advanced, not where a supervening event had made it impossible to perform the letter of the contract, but where performance of the letter of the contract had become something radically different from that which the parties contemplated when it was concluded.

Lord Radcliffe in Davis Contractors Ltd v. Fareham UDC [1956] AC 696 at 728 and Lord Simon advanced the following refinement of that test:

Frustration of a contract takes place when there supervenes an event (without default of either party and for which the contract makes no sufficient provision) which so significantly changes the nature (not merely the expense or onerousness) of the outstanding contractual rights and/or obligations from what the parties could reasonably have contemplated at the time of its execution that it would be unjust to hold them to the literal sense of its stipulations in the new circumstances; in such case the law declares both parties to be discharged from further performance.

Initially the effect of frustration was to terminate the parties' respective obligations from the date of the frustrating event, but to leave outstanding any accrued obligations. This harsh result was mitigated to a degree by the decision of the House of Lords in the Fibrosa case [1943] AC 32 and to a greater degree by the Law Reform (Frustrated Contracts) Act 1943.

What do these developments in the law of frustration have to tell us about the law of common mistake? First that the theory of the implied term is as unrealistic when considering common mistake as when considering frustration. Where a fundamental assumption upon which an agreement is founded proves to be mistaken, it is not realistic to ask whether the parties impliedly agreed that in those circumstances the contract would not be binding. The avoidance of a contract on the ground of common mistake results from a rule of law under which, if it transpires that one or both of the parties have agreed to do something which it is impossible to perform, no obligation arises out of that agreement.

In considering whether performance of the contract is impossible, it is necessary to identify what it is that the parties agreed would be performed. This involves looking not only at the express terms, but at any implications that may arise out of the surrounding circumstances. In some cases it will be possible to identify details of the "contractual adventure" which go beyond the terms that are expressly spelt out, in others it will not.

Just as the doctrine of frustration only applies if the contract contains no provision that covers the situation, the same should be true of common mistake. If, on true construction of the contract, a party warrants that the subject matter of the contract exists, or that it will be possible to perform the contract, there will be no scope to hold the contract void on the ground of common mistake.

This test is applicable whether or not the event occurs as a result of the default of one of the parties to the contract, but the consequences of the event are different in the two cases. Where the event occurs as a result of the default of one party, the party in default cannot rely upon it as relieving himself of the performance of any further undertakings on his part, and the innocent party, although entitled to, need not treat the event as relieving him of the further performance of his own undertakings. This is only a specific application of the fundamental legal and moral rule that a man should not be allowed to take advantage of his own wrong. Where the event occurs as a result of the default of neither party, each is relieved of the further performance of his own undertakings, and their rights in respect of undertakings previously performed are now regulated by the Law Reform (Frustrated Contracts) Act, 1943.

Monday, August 01, 2005

English Legal System

This is the beginning. Will blog study guides to English Legal System. May be helpful for those attempting LLB