Chapter 10: Mistakes

Question 1

1 Introduction

Answer 1

‘Mistake’ has a narrower meaning in contract law than it does in its ordinary English meaning. If a contract is affected by mistake in the way the word is used in contract law (called an ‘operative’ mistake), then there are serious consequences: the contract is void meaning the contract will be declared a nullity from its beginning, or to use the legal Latin term, the contract is void ab initio.

Question 2

Void v Voidable

Answer 2

Void’ is different to ‘voidable’ – the latter means that the contract can be brought to an end/avoided, but until that happens, it remains in force – it is not declared a nullity from the beginning.

Operative mistake: A mistake which is recognised in the law of contract as preventing a contract from taking legal effect – the contract will be void from the outset.

Void: A contract which is void has no legal effect from the outset.

Question 3

Law of Mistake

Answer 3

The law of mistake is therefore an exception to the general rule of contract that parties are bound by the terms of their agreement and must rely on the contract for protection from the effect of facts unknown to them.

At the heart of the concept of mistake is the idea that the parties have not truly reached an agreement: either the parties cannot be said to have reached agreement because of the mistake, or the mistake renders the agreed contract something other than that which was intended.

Question 4

2.1 Common mistake

Answer 4

Common mistake occurs where both parties to an agreement are suffering from the same misapprehension. It is necessary to consider whether the underlying common mistake is sufficiently fundamental to
affect the validity of the contract.

Question 5

2.1.1 Common mistake as to a fact or quality fundamental to the agreement

Answer 5

In the absence of contractual misdescription, the general proposition is that mistake about the quality of goods does not void the contract. This is the case even if the mistake as to quality affects the utility of the goods to the buyer, or, alternatively, affects the value of the goods in question. It has been suggested that there is a limited category of cases where the mistake is so severe that
the contract will be void for mistake as to quality

Question 6

Restrictive approach to common mistake

Answer 6

It could be a question of whether the mistake is such that the subject matter is
‘essentially different’ from that intended (Bell v Lever Brothers [1932] AC 161), or alternatively whether the mistake renders the assumed performance ‘impossible’, or whether the subject matter is rendered ‘radically different’.

Question 7

Leaf v International Galleries [1950] 2 KB 86.

Answer 7

The restrictive approach to common mistake in Bell v Lever Brothers was endorsed in Leaf v International Galleries [1950] 2 KB 86. Although Leaf’s action was in misrepresentation, the court stated, obiter, that a claim in mistake in relation to a painting both the buyer and seller mistakenly believed to be a Constable would fail. The parties had contracted for the sale of a painting, and this is what the buyer received under the contract. It is worth noting, however, that a remedy in
misrepresentation may be available in such circumstances.

Question 8

Circumstances where common mistake will not operate

Answer 8

(a) The mistake is not sufficiently fundamental.
(b) One party is at fault.
(c) The contract makes provision for the issue.

Question 9

2.2 Mutual mistake

Answer 9

Mutual mistake occurs where both parties are mistaken but they are mistaken about different things. In other words, they have negotiated at cross purposes.

Example: Mutual mistake
Where A and B have negotiated completely at cross purposes, whereby A is offering one thing whilst B is accepting another, it cannot be said that they were ever in agreement. Genuine mutual consent is obviously lacking. Such a contract will be void. For example, A agrees to sell a horse to B. A intended to sell his chestnut horse, but B thought he was agreeing to buy A’s grey horse. Needless to say, the colour of the horse was not mentioned during the formation of the contract.

Question 10

Objective Test based on reasonable Third Party

Answer 10

The court will employ an objective test and decide what a reasonable third party would believe the agreement to be, based on the words and conduct of the parties themselves. Using this test, it may be decided that the agreement was that
which A understood it to be or that which B understood it to be, or it may be decided that no meaning can be attributed to the agreement at all. The result is that if, from the available evidence, a reasonable person would infer the existence of a contract in a given sense, the court will hold that a contract in that sense is binding upon both parties, notwithstanding a material
mistake.

Question 11

2.3 Unilateral mistake

Answer 11

Unilateral mistake occurs where only one party is mistaken and the other party knows, or is deemed to know, of the mistake.
Where unilateral mistake has occurred, the acceptance does not correspond with the offer, and there is consequently no real agreement reached.

Question 12

Example 1: Unilateral mistake as to the expression of intention

Answer 12

Where the offeror makes a material mistake in expressing their intention, and the other party knows, or is deemed to know, of the error, the mistake is likely to lead to the contract being void.

Question 13

Hartog v Colin & Shields [1939] 3 All ER 566

Answer 13

The defendants entered into a contract to
sell 3,000 Argentinian hare skins to the claimants. By mistake, they offered them for sale at 10d per pound, instead of the 10d per piece they intended. The negotiations had proceeded on the basis of a price per piece (there being three pieces per pound). As a result, the court found that the defendants’ offer was not an accurate reflection of their true intention and that there was no
binding contract. The claimants could not ‘snap up’ an offer when that party was aware that the other had made a mistake relating to the offer terms.

Question 14

Example 2: Unilateral mistake as to the nature of the document signed

Answer 14

The general rule is that a person is bound by the terms of any instrument which they sign or seal even though they did not read it or did not understand its contents: L’Estrange v Graucob [1934] 2 KB 394. An exception to this general rule arises, under certain circumstances, where a person signs or seals a document under a mistaken belief as to the nature of the document. Where a person signs a document or executes a deed in such instances, they may raise the defence of non
est factum (‘it is not my deed’).

Question 15

Plea of non est factum

Answer 15

(a) The blindness, illiteracy, or senility of the person signing; or
(b) A trick or fraudulent misrepresentation as to the nature of the document, provided that
person took all reasonable precautions before signing.

Question 16

Thoroughgood’s Case (1584) 2 Co Rep 9a a

Answer 16

In Thoroughgood’s Case (1584) 2 Co Rep 9a an illiterate woman was induced to execute
a deed in the belief that it was concerned with arrears of rent. In fact, the document was a deed releasing another from claims which the woman had against him. It was held that the deed was a nullity.

Question 17

Example 3: Unilateral mistake as to the identity of the person contracted with

Answer 17

In this type of mistake, one party mistakenly believes they are contracting with a person that the other party is pretending to be. Whether or not such a contract is void depends on the precise circumstances. Unilateral mistake as to identity is considered in a separate section.

Question 18

2.4 Summary

Answer 18

• If a contract is affected by a mistake recognised in contract law as an ‘operative mistake’, it
  will mean the contract is void – it has no legal effect from its outset.
• There are three categories of mistake that can amount to operative mistakes: common mistake,
  mutual mistake and unilateral mistake.

Question 19

Lewis v Averay [1972] 1 QB 198

Answer 19

The claimant put an advertisement in a newspaper, offering to sell his car for £450. In response to the advertisement, a man (who turned out to be a fraudster) telephoned and asked if he could see the car. That evening, when he came to see the car, he told the claimant that he was
Richard Greene, making the claimant believe that he was the well-known film actor of that name. The fraudster wrote a cheque for the agreed sum of £450. At first, the claimant was not prepared to let him take the car until the cheque had cleared.

Question 20

Lewis v Averay [1972] 1 QB 198

Answer 20

When the fraudster pressed to be allowed to
take the car with him, the claimant asked: ‘Have you anything to prove that you are Mr Richard A. Greene?’. The fraudster produced a special pass of admission to Pinewood Studios, bearing his own photograph and the name of Richard A. Greene. The claimant was satisfied that the man really was Mr Richard Greene, the film actor. He let the fraudster take the car in return for the
cheque.

A few days later, the claimant discovered that the cheque was worthless. In the meantime, the fraudster sold the car to the defendant, who paid £200 for it entirely in good faith. The fraudster then disappeared. The claimant brought an action against the defendant, claiming damages for
conversion.

Question 21

Lewis v Averay [1972] 1 QB 198 Judgement

Answer 21

The Court of Appeal held that it is presumed that the seller intended to deal with the person in front of them identified by sight and hearing and that is what had happened. So the contract was not void for mistake, although it would be voidable for misrepresentation (the fraudster had
misrepresented who he was).

This presumption will only be rebutted, and the contract held void for mistake, if the seller is able to establish that identity, rather than attributes, was of ‘vital importance’. Applying that test to the facts, the Court of Appeal held that what the seller really cared about in this case was Mr Green’s creditworthiness – an attribute, rather than a matter identity. Therefore, the contract was
voidable for misrepresentation (the buyer had misrepresented his attributes) but not void for mistake

Question 22

Third Party Role

Can the claimant take the car back?

Answer 22

The answer will often depend on whether the contract is void for mistake (because the mistake is about identity) or voidable for misrepresentation (because the mistake is about attributes). You might recall that ‘void’ means the contract will be declared a nullity from its beginning, whereas ‘voidable’ means that the contract can be brought to an end/avoided, but until that happens, it
remains in force.

Question 23

Acquisition of title

Answer 23

Voidable = Passes: Where a contract for the sale of goods is voidable then until it is avoided title (ownership) still passes from the seller to the buyer, albeit the buyer’s title is a ‘voidable title’ – one that could later
be avoided. If the buyer seeks to sell the goods on to a third party, s 23 of the Sale of Goods Act 1979 is relevant because it provides that:

When the seller of goods [in the scenario above, this means the fraudster] has a voidable title thereto, but his title has not been avoided at the time of the sale, the buyer [in the scenario above, this means the third party] acquires a good title to the goods, provided he buys them in good faith and without notice of the seller’s defect in title.

Provided the third party does not know about or have reason to suspect the deception, the third party has acquired good title, and the claimant cannot take the car back. In practical terms, the seller is likely to be left without a remedy.

Question 24

Void for Mistake

Answer 24

On the other hand, where the identity of the buyer is fundamental and the contract is void for mistake, then it is void and ineffective from the outset. The buyer (the fraudster) has no title (voidable or otherwise) and cannot give any sort of title to the third party by selling the goods on. This is an example of the principle of nemo dat quod non habet (‘no one gives who possesses not’
- you cannot give what you do not have). As the third party has no title, the third party must return the goods to the duped seller, even if the third party paid good money for the goods and knew nothing about the deception.

Question 25

3.2.1 What if the parties do not contract face-to-face? Cundy v Lindsay (1878) 3 App Cas 459

Answer 25

In Cundy v Lindsay (1878) 3 App Cas 459 a man called Blenkarn placed an order with Lindsay on credit (ie payment would be after delivery) for goods to be delivered to ‘Blenkarn, 37 Wood Street’. There was a reputable firm of Blenkiron & Co. at 123 Wood Street. Blenkarn signed his signature in such a way as to make it appear that he was in fact ordering for Blenkiron, and Lindsay (who knew of Blenkiron but not their precise address) believed they were dealing with Blenkiron. Blenkarn took delivery of the goods and sold them on to Cundy. Blenkarn never paid Lindsay. Lindsay brought a claim against Cundy on the basis they never got good title to the goods.

It was held that the respondents at all times believed that they were dealing with Blenkiron & Co. of Wood Street and not the fraudster, Blenkarn. The contract was void for mistake as to identity.

Question 26

Key case: Shogun Finance Ltd v Hudson [2004] 1 AC 919

Answer 26

Facts: In this case a fraudster visited the showrooms of a car dealer and agreed to buy a car on hire-purchase terms. The fraudster signed a draft finance agreement in the name of Mr Patel. As proof of identity the fraudster produced a genuine but unlawfully obtained driving licence in the name of a Mr Patel. The car dealer sent the signed document and a copy of the licence to the finance company, Shogun Finance Ltd. The finance company checked the credit rating of Mr Patel and approved the sale. The fraudster paid a minimal deposit and drove the car away with its accompanying paperwork. The fraudster immediately sold the car on to an innocent third party,
Mr Hudson. The finance company traced the car to Mr Hudson and sued him for the return of the car, or its value.

Held: Shogun Finance Ltd was entitled to the return of the car as the contract was void for
mistake.

Question 27

Key case: Shogun Finance Ltd v Hudson [2004] 1 AC 919

Answer 27

In Shogun v Hudson the House of Lords considered both face-to-face situations as in Lewis v Averay, and distance-selling situations as in Cundy v Lindsay. The majority ultimately decided that Shogun was a distance-selling situation between the finance company and the fraudster,
and decided to keep the distinction, reaffirming the principles to be considered in each situation as set out in this chapter.

Question 28

King’s Norton Metal Co Ltd v Edridge Merrett & Co Ltd (1897) 14 TLR 98 (CA)

Answer 28

Not every distance selling transaction will result in the court finding the contract void by mistake. In King’s Norton Metal Co Ltd v Edridge Merrett & Co Ltd (1897) 14 TLR 98 (CA) the claimant sent goods on credit to Hallam and Co., a fictitious entity, created by the fraudster. The letterhead used by the fraudster gave the impression of a large and successful company. The court held that the mistake made by the original seller in this case was one as to attributes (ie the creditworthiness of the fraudster), not identity. Unlike Cundy v Lindsay where the claimants intended to deal with an identifiable third party (Blenkiron & Co. who were known to them) in King’s Norton, the claimants intended to deal with the writer of the letters.

Question 29

3.3 Summary

Answer 29

• In a face-to-face transaction the court will presume that the seller intended to deal with the person in front of them. This is a difficult presumption to rebut and requires the seller to show that identity, not attributes (ie creditworthiness) was of ‘vital importance’. Although there is a misrepresentation of attributes, this is rarely a useful remedy for the innocent party.
• The innocent party is usually the seller and will generally want to argue that the property purportedly sold has not in fact been sold, and therefore still belongs to the seller – this requires the contract to be void for mistake, not merely voidable for misrepresentation.
• In a distance selling transaction it is easier for the seller to show that they intended only to deal with the person named in the correspondence and if proved a finding of mistake will follow. Mistake renders a contract void and title will remain with the original seller.