7 - Mistake and Illegality Flashcards
What is the legal meaning of ‘mistake’ in contract law?
- In contract law, the term ‘mistake’ has a more restricted meaning than in common parlance.
- The doctrine of mistake operates in exceptional circumstances where one or both parties can establish that the contract was entered into under a mistake so fundamental it negates agreement and the existence of a contract.
- Many situations considered mistakes in the popular sense are not legally recognised (e.g., if the parties objectively appear to be in agreement) or are dealt with on other grounds such as misrepresentation.
- The mistake must precede the contract and have induced it.
- The only remedy for mistaken identity is for a court to declare the contract void.
What is the difference between a void and voidable contract?
A contract which is void, in contrast to voidable, is void from the outset. It has no legal effect from the outset.
A contract which is voidable is liable to be set aside by the court.
What are the three types of mistake in contract law?
There are three types of mistake:
- Common mistake: Both parties make the same fundamental mistake.
- Cross-purpose mistake: The parties are at cross-purposes about a crucial aspect of the contract.
- Unilateral mistake: Only one party is mistaken, such as a mistake about the identity of the other contracting party.
What are the strict limitations on the operation of common mistake in contract law?
Common mistake (also called ‘identical’ or ‘shared mistake’) occurs when both parties make the same fundamental mistake.
It operates under strict limitations, similar to frustration (which involves supervening impossibility):
- It will not apply if one party is at fault.
- The contract must not include an express provision regarding the matter in question.
- The mistake must be fundamental, making performance impossible or radically different from what was anticipated.
An example of a fundamental mistake is when both parties are mistaken about the existence of the subject matter of the contract.
Example: If Ruhi agrees to sell her car to Bharat, but the car has already been destroyed in a fire, the contract is void since there is nothing to contract about.
How did the case of Bell v Lever Bros [1932] illustrate the limits of common mistake regarding the quality of subject matter?
- In Bell v Lever Bros [1932], Bell and another executive were compensated for early termination of their service contracts with Lever Bros.
- After the contracts were settled, it was discovered that Bell and the other executive had previously breached their service contracts, meaning they could have been dismissed without compensation.
- Lever Bros sued for the return of compensation, arguing that the settlement agreements were void for mistake as both parties had wrongly believed the contracts were valid.
- The House of Lords held that the mistake was not fundamental enough to void the contracts because it was a mistake as to quality, which is unlikely to make performance radically different.
The case demonstrates that mistakes as to quality are typically viewed as a last resort argument when no other cause of action (e.g., misrepresentation or breach of contract) is available.
What is a cross-purpose mistake, and how was this principle applied in the case of Raffles v Wickelhaus (1864)?
A cross-purpose mistake occurs when the parties are at cross-purposes about a crucial aspect of the contract, leading to an irreconcilable ambiguity about what was agreed.
If the ambiguity cannot be objectively resolved, there is no contract.
In Raffles v Wickelhaus (1864), a contract was made to sell cotton ‘ex Peerless from Bombay.’
- There were two ships named Peerless, one that sailed in October and another in December.
- The seller sued when the buyer refused to take delivery from the ship that sailed in December, claiming they believed the contract referred to the October ship.
- The court held that the ambiguity regarding which ship was intended made it impossible to determine the contract’s terms objectively, so the contract was void.
What is a unilateral mistake in contract law, and when does a mistake as to identity render a contract void?
A unilateral mistake occurs when only one party is mistaken, often regarding the identity of the other contracting party.
A contract is void if the mistake is about the identity of the other party, provided that the identity is of vital importance to the contract.
If the mistake is about a party’s attributes (e.g., creditworthiness), the contract is generally not void.
Example: In Cundy v Lindsay (1878), a rogue, posing as a reputable company (Blenkiron), ordered goods from the plaintiffs:
- The plaintiffs believed they were contracting with Blenkiron, not the rogue.
- The court held the contract was void for mistaken identity because the plaintiffs intended to deal specifically with Blenkiron, making identity crucial.
- This allowed the plaintiffs to recover the goods despite the rogue reselling them to an innocent purchaser. The innocent purchaser will be left suing the rouge, if they can be found.
What would the claims of the mistaken party and innocent purchaser be where there is a unilateral mistake?
The mistaken party’s damages claim would be for breach of an express term and/ or misrepresentation.
The innocent purchaser’s claim would be for breach of the statutory implied condition in contracts for the sale of goods that the seller has title to the goods that they can pass on (SGA 1979, s 12 in relation to business- to- business contracts and CRA 2015, s 17 in relation to business- to- consumer contracts).
Of the two innocent parties the courts tend to have less sympathy with the mistaken party – hence why mistaken identity rarely succeeds where the deal was struck in a face-to-face situation.
How is the distinction between mistakes as to identity and mistakes as to attributes treated in face-to-face transactions?
In face-to-face situations, there is a strong presumption that the innocent party intends to deal with the person physically present, even if they are pretending to be someone else.
As a general rule, in face-to-face situations it will be much more difficult for a person to argue they intended to deal with someone other than the person physically present in front of them.
The contract is unlikely to be void for mistake but could be rescinded for misrepresentation.
Case example: Lewis v Averay (1972) illustrates this. The plaintiff sold his car to a man claiming to be the actor Richard Greene, based on a fraudulent cheque. The court ruled that the mistake was related to the man’s creditworthiness, not his identity, and the contract remained valid, as the mistake was not fundamental enough to invalidate the agreement.
How does the presumption of mistaken identity differ in written contracts compared to face-to-face transactions?
(a) If the parties are dealing face- to- face there is a strong presumption that the innocent
party intends to deal with the person in front of them (ie the rogue) rather than the person
they are pretending to be. As such, the contract is unlikely to be declared void for mistake
although it might be rescinded for misrepresentation.
(b) Where dealings are conducted exclusively in writing, the above presumption does not
apply. Instead, the written agreement must be construed to determine with whom the innocent party intended to contract. If it was with someone other than the rogue then the contract might be void for mistake.
(c) The nature of the transaction may indicate to the rogue that it is vital they possess a
particular attribute and if they do not do so, the offer is not addressed to them. For example, if someone orally commissions a portrait from an unknown artist passing themselves off as a famous painter, the rogue could not accept the offer: in other words there would be no contract with the rogue: it would be void.
(d) If the person/ entity who the rogue is pretending to be actually exists and is known to the mistaken party (eg a registered company) it suggests the offer is not addressed to the
rogue. So again there could be no contract with the rogue: it would be void
When is a contract considered illegal and what are the consequences of illegality?
A contract is illegal if its formation, purpose, or performance involves the commission of a legal wrong (e.g., breach of statutory provisions or violation of public policy).
As a general rule, illegal contracts are void, and courts will not allow recovery of benefits conferred in the performance of an illegal contract.
Contracts may be illegal at the time of formation (e.g., contracts to commit a crime) or due to the way they are performed.
If the illegal act is purely incidental to the performance of the contract (e.g., speeding while delivering goods), the contract remains valid. It is sufficient for the wrongdoer to be punished for the illegal act.
Case example: St John Shipping Corp. v Joseph Rank Ltd (1957) – A statute made it an offence to overload a ship, but the court ruled the contract was not voided, as the statute did not prohibit contracts performed in breach of the load line rule. The charterers were fined for the breach, but the contract itself remained enforceable.
How do courts treat contracts when both parties are aware of illegal performance versus when only one party knows?
When both parties are aware that the performance of the contract is illegal, courts generally hold that neither party is entitled to enforce the contract, rendering it void.
- Case example: Ashmore, Benson, Pease & Co Ltd v AV Dawson Ltd (1973) – The plaintiffs knowingly agreed to transport boilers on lorries that could not lawfully carry them. When the boilers were damaged, the owner’s claim for damages was rejected as they had participated in the illegality.
When only one party knows about the illegal performance, the innocent party may still be able to enforce the contract, but the party responsible for the illegal act will not be permitted to do so.
What remedial consequences will the court have in mind when an illegal contract is entered into?
When determining the remedial consequences of entering an illegal contract the underlying policy question to be considered is “whether allowing recovery for something which was illegal would produce inconsistency and disharmony in the law, and so cause damage to the integrity of the legal system’.
- In order to determine this question, the Supreme Court in Patel v Mirza identified the following ‘trio of necessary conditions’:
a) ‘To consider the underlying purpose of the prohibition which has been transgressed and whether that purpose will be enhanced by denial of the claim,
b) To consider any other relevant public policy on which the denial of the claim may have an impact and
c) To consider whether denial of the claim would be a proportionate response to the illegality, bearing in mind that punishment is a matter for the criminal courts.’
What makes a contract illegal under statute?
A contract is illegal under statute where its terms violate a statutory provision.
Example: The Competition Act 1998 renders unenforceable contracts that restrict, prevent, or distort trade within the UK, as these contracts are contrary to statutory law and public policy.
What are the general principles behind contracts that are illegal at common law, and when might such terms be enforceable?
Courts will refuse to enforce contracts that are contrary to public policy or morality, such as:
- Contracts that challenge the sanctity of marriage.
- Contracts that are sexually immoral.
- Contracts that challenge the jurisdiction of the court.
Covenants in restraint of trade are also commonly void as contrary to public policy. These include clauses:
- In employment contracts preventing senior employees from working for a competitor after termination.
- In sale and purchase agreements preventing a seller from setting up a competing business nearby.
However, restraints of trade may be enforceable if:
- There is a legitimate business interest to protect eg customers, employees and trade secrets; and
- The restraint is reasonable in terms of geographical area, duration and scope of prohibited activities.
