Chapter 8 - Mistake and Illegality

Question 1

What is the doctrine of mistake in contract law?

Answer 1

The doctrine of mistake operates in rare cases where a party, or both parties, demonstrate that a contract was agreed upon under a misunderstanding so substantial that it effectively cancels the agreement and, as a result, the contract itself.

Question 2

What are the learning outcomes of Chapter 8 of the Contract Law textbook?

Answer 2

After finishing this chapter, you should be able to:
* Identify when a client might argue a contract is void due to mistake or illegality.
* Advise on various types of mistakes in contract law.
* Advise on the circumstances and methods of determining a contract’s illegality.

Question 3

What are the three main types of mistakes in contract law?

Answer 3

The three types of mistakes are:
* Common Mistake: Both parties share the same fundamental misunderstanding.
* Cross-Purpose Mistake: The parties have a misunderstanding on a key element of the contract, leading to conflicting interpretations.
* Unilateral Mistake: Only one party is mistaken, such as misidentifying the other party.

Question 4

What is a Common Mistake?

Answer 4

A common mistake, also called ‘identical mistake’ or ‘shared mistake’, arises when both parties to a contract operate under the same fundamental misunderstanding.

Question 5

What are the limitations of the Common Mistake doctrine?

Answer 5

The common mistake doctrine will not apply if one party is at fault, if the contract explicitly addresses the matter, or if the mistake is not fundamental enough to render performance impossible or significantly different from the parties’ expectations.

Question 6

Provide an example of a Common Mistake that would render a contract void.

Answer 6

If you agree to sell me your car, but unbeknownst to both of us, the car was already destroyed in a fire, the contract would be void due to a common mistake.

Question 7

Does a mistake about the subject matter’s quality usually invalidate a contract?

Answer 7

Generally, a simple mistake about the subject matter’s quality is not considered substantial enough to void a contract.

Question 8

Explain the case of Bell v Lever Bros AC 161 and its relevance to mistake in contract law.

Answer 8

In Bell v Lever Bros, Lever Bros terminated contracts with two executives, later discovering the executives could have been dismissed without compensation due to previous breaches. The House of Lords ruled that the mistake was not fundamental enough to void the settlement agreements.

Question 9

What is a Cross-Purpose Mistake?

Answer 9

In a cross-purpose mistake, although one or both parties may believe a contract exists, it is impossible to objectively resolve the ambiguity surrounding the agreement.

Question 10

Provide an example of a Cross-Purpose Mistake that rendered a contract void.

Answer 10

The case of Raffles v Wickelhaus (1864) is an example of a cross-purpose mistake, where two ships named ‘Peerless’ created an irresolvable ambiguity, resulting in the court declaring the contract void.

Question 11

What is a Unilateral Mistake?

Answer 11

A unilateral mistake happens when only one party is mistaken, often regarding the other party’s identity.

Question 12

When does a unilateral mistake about the identity of the other party render the contract void?

Answer 12

For a unilateral mistake regarding identity to void a contract, the identity of the other party must be of vital importance.

Question 13

Explain the case of Cundy v Lindsay (1878) and its relevance to unilateral mistake.

Answer 13

In Cundy v Lindsay, a rogue ordered goods by mimicking a reputable company’s signature. The court held the contract void for mistake because the identity of the other party was crucial.

Question 14

Why did the plaintiff in Cundy v Lindsay rely on mistake rather than misrepresentation to recover the goods?

Answer 14

The plaintiff couldn’t rely on misrepresentation because the goods had been resold to innocent purchasers, making rescission impossible.

Question 15

What happens when a bona fide purchaser acquires goods involved in a case of mistaken identity?

Answer 15

When a bona fide purchaser obtains goods involved in a case of mistaken identity, the courts tend to favor the innocent purchaser.

Question 16

Why is it generally more difficult to argue mistaken identity in face-to-face dealings?

Answer 16

In face-to-face situations, there is a strong presumption that the innocent party intends to deal with the person physically present.

Question 17

Discuss the case of Lewis v Averay and its significance regarding mistaken identity.

Answer 17

In Lewis v Averay, the court ruled that the plaintiff was more concerned about the man’s creditworthiness than his true identity, making it a mistake about an attribute, not fundamental enough to invalidate the contract.

Question 18

How do you determine if a contract is voidable (for misrepresentation) or void (for mistake)?

Answer 18

Distinguishing between voidable and void contracts can be complex. In face-to-face dealings, a strong presumption exists that the innocent party intends to deal with the person present.

Question 19

How does the nature of the transaction affect the determination of mistake vs. misrepresentation?

Answer 19

If the transaction’s nature indicates to the rogue that possessing a specific attribute is crucial, the offer isn’t considered to be addressed to the rogue, resulting in no contract with them.

Question 20

What is the impact of the existence of the impersonated person or entity on a mistaken identity claim?

Answer 20

If the person or entity the rogue is impersonating exists and is known to the mistaken party, it implies the offer is not directed at the rogue.

Question 21

What is an illegal contract?

Answer 21

An illegal contract is one where its creation, purpose, or performance involves a legal wrong.

Question 22

When can a contract be deemed illegal?

Answer 22

Contracts can be illegal either at their formation or because of how they are performed.

Question 23

What are the consequences of a contract being deemed illegal?

Answer 23

Generally, illegal contracts are void, meaning they are unenforceable in court.

Question 24

Provide an example of a contract illegal at its formation.

Answer 24

A straightforward example of an illegal contract from the outset is a contract to commit a crime.

Question 25

Can a legally formed contract become illegal?

Answer 25

Some contracts are formed legally but are executed in an illegal manner.

Question 26

Explain the case of St John Shipping Corp v Joseph Rank Ltd and its relation to the legality of contracts.

Answer 26

In St John Shipping Corp v Joseph Rank Ltd, the court held that the contract was not voided despite a statute penalizing the action, demonstrating that incidental illegality may not always invalidate the entire contract.

Question 27

What happens to a contract when both parties are aware of its illegal performance?

Answer 27

When both parties knowingly engage in illegal performance of a contract, courts generally prevent either party from enforcing it.

Question 28

Discuss the case of Ashmore, Benson, Pease & Co Ltd v AV Dawson Ltd and its relevance to contracts with illegal performance.

Answer 28

The owner’s claim for damages was rejected because of their participation in the illegality, illustrating that knowingly engaging in illegal performance nullifies contractual rights.

Question 29

Can an innocent party enforce a contract performed illegally by the other party without their knowledge?

Answer 29

If one party performs a contract illegally without the other party’s knowledge, the innocent party might still be able to enforce the contract.

Question 30

Provide an example of a contract illegal under statute.

Answer 30

The Competition Act 1998 makes contracts unenforceable if they have the effect of restricting, preventing, or distorting trade within the UK.

Question 31

Give examples of contracts deemed illegal at common law.

Answer 31

Contracts that are against public policy or morality are deemed illegal at common law, such as contracts that undermine the sanctity of marriage.

Question 32

What are Covenants in Restraint of Trade?

Answer 32

Covenants in restraint of trade are clauses that restrict an individual or business from engaging in certain activities.

Question 33

Why are Covenants in Restraint of Trade considered prima facie void?

Answer 33

Covenants in restraint of trade are initially considered void because they contradict public policy.

Question 34

When are Covenants in Restraint of Trade considered enforceable?

Answer 34

Restraints of trade can be enforceable if there is a legitimate business interest to protect and the restraint is reasonable in scope.

Question 35

Provide an example analyzing Covenants in Restraint of Trade in a coach operator company.

Answer 35

NW Coaches Ltd may not have a legitimate business interest to protect in relation to its coach drivers, making any restraint of trade clauses in the drivers’ contracts potentially unenforceable.

Question 36

How does the seniority of an employee impact the reasonableness of a restraint of trade covenant?

Answer 36

In the case of more senior employees, legitimate business interests may exist, but restraints must still be reasonable.

Question 37

What is the general rule about the duration of a restraint of trade covenant?

Answer 37

Generally, the longer the duration of a restraint of trade, the more likely it is to be deemed unreasonable.

Question 38

What is the general rule about the duration of a restraint of trade covenant?

Answer 38

Generally, the longer the duration of a restraint of trade, the more likely it is to be deemed unreasonable. The reasonableness, however, depends on the specific circumstances.

For example, a senior executive’s reasonable restraint period might be longer than that of a newly appointed business development manager.

Question 39

What are the legal remedies for a breach of an enforceable restraint of trade covenant?

Answer 39

If a restraint of trade covenant is deemed reasonable and enforceable, the former employer can seek legal remedies for its breach. These remedies typically include injunctive relief and/or damages to compensate for losses resulting from the breach.

Question 40

What are the key takeaways regarding mistake in contract law?

Answer 40

• Three types of mistake exist: common, cross-purpose, and unilateral.
• The mistake must be fundamental and occur before the contract formation.
• Mistake renders a contract void.
• Mistake is often pleaded as a last resort when other legal options are unavailable.

Question 41

What are the key takeaways regarding illegality in contract law?

Answer 41

• Contracts can be illegal from their inception or become illegal due to their performance.
• Illegality can stem from statutory violations, common law principles, or public policy considerations.
• Illegal contracts are generally unenforceable.
• Covenants in restraint of trade, although prima facie void, are enforceable if they protect a legitimate business interest and are reasonable in scope.

Question 42

Summarize the enforceability of covenants in restraint of trade.

Answer 42

Covenants in restraint of trade are void unless the contract includes a legitimate business interest to protect, and the restraint is reasonable in terms of geographical area, duration, and the activity it prohibits.