Privity of contract and mistake

Question 1

What is a mistake in contract law and what effect does it have on the contract?

Answer 1

An operative mistake is 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.

Question 2

What are three categories of mistake?

Answer 2

1. Common mistake - this occurs where both parties to an agreement are suffering from the same misapprehension.
2. Mutual mistake - this occurs where both parties are mistaken but about different things.
3. Unilateral mistake - this occurs where only one party is mistaken and the other party knows, or is deemed to know, of the mistake.

Question 3

What is the effect of common mistake as to the existence of subject matter on a contract?

Answer 3

Void, unless contract impliedly/expressly allocates this risk.

Question 4

What is the effect on a contract of common mistake as to a fact or quality fundamental to the agreement?

Answer 4

Void, only in the most severe instances of mistake.

Question 5

What is the effect on a contract of mutual mistake as to the identity of the subject matter?

Answer 5

Void.

Question 6

What is the effect on a contract of unilateral mistake as to identity of the person contracted with?

Answer 6

Void, but very hard to show in face to face transactions.

Question 7

Where the offeror makes a material mistake in expressing their intention, and the offeree knows or is deemed to know, what is the effect on the contract?

Answer 7

The contract is likely to be void.

Question 8

What is the general rule regarding whether a person is bound by the terms of any instrument which they sign/seal?

Answer 8

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 understand its contents-L’Estrange v Graucob (1934).

Question 9

What is the exception to the general rule that a person is bound by the terms of any instrument they sign/seal?

Answer 9

Where the person signs/seals the document under a mistaken belief as to the nature of the document-the defence of non est factum (it is not my deed).

Question 10

When is the defence of non est factum available, refer to Thoroughgood’s Case (1584)?

Answer 10

Where the mistake was due to either:

-blindness, illiteracy or senility of the person signing; or
-a trick or fraudulent misrepresentation as to the nature of the document

Thoroughgood’s Case (1584): an illiterate woman was induced to execute a deed in the belief that it was concerned with arrears of rent when it was actually releasing another from claims which the woman had against him-the deed was held to be a nullity.

Question 11

What is unilateral mistake of identity, refer to Lewis v Averay (1972)?

Answer 11

This is where one party mistakenly believes they are contracting with a person that the other party is pretending to be.

Lewis v Averay (1972)

FACTS: the C sold his car to a fraudster that was impersonating a famous actor, Richard Greene. They agreed on the price of £450 for the car and the fraudster paid by cheque after producing fake ID. The fraudster then sold the car on to the D and disappeared, the cheque also bounced.

HELD: it was held that the mistake to the real identity of the fraudster did not prevent a valid contract being created between him and the C. There was a face to face interaction, where the law presumes contract. However, this was fraud and impersonation by the fraudster, which would render a contract voidable and it could be set aside. Yet, this must be done before a third party acquires the rights. In this case, the contract was not set aside before the D, in good faith, purchased the car.

Contract will only be void for mistake where the seller is able to establish that identity, rather than attributes, was of vital importance.

Question 12

When a fraudster sells goods on to a third party, what is required for the third party to acquire good title?

Answer 12

S23 SGA 1979: when the seller of goods has a voidable title thereto, but his title has not been avoided at the time of the sale, the buyer acquires a good title to the goods, provided he buys them in good faith and without notice of the seller’s defect in title.’

Question 13

What happens when the identity of the buyer is fundamental and the contract is void for mistake from the outset?

Answer 13

The buyer has no title and cannot give any sort of title to the third party by selling the goods on.

Question 14

Will a contract be void for mistake if the parties have contracted through correspondence, refer to Cundy v Lindsay (1878)?

Answer 14

Yes, most likely.

Cundy v Lindsay (1878): a contract made via correspondence was void for mistake as to identity as a fraudster had pretended to be a reputable firm when he was not. He never paid for the goods and had doctored his signature.

Question 15

Describe the case of Shogun Finance v Hudson (2004) in relation to unilateral mistake of identity.

Answer 15

A fraudster visited the showrooms of a car dealer and agreed to buy a car on PCH. He signed a draft finance agreement in the name of Mr Patel and produced a fake ID.

The car company sent the signed agreement and fake ID to the C finance company who approved the sale. The fraudster paid a minimal deposit and drove the car away and immediately sold it on to an innocent third party, the D.

The C finance company traced the car to the D and sued him for return of the car. It was held that the C was entitled to return of the car as the contract was void for mistake

Question 16

What is the underlying policy question when considering illegality in contract cases?

Answer 16

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.

Question 17

What is the trio of necessary conditions when considering illegality as set out in Patel v Mirza (2016)?

Answer 17

1. To consider the underlying purpose of the prohibition which has been transgressed and whether that purpose will be enhanced by denial of the claim;
2. To consider any other relevant public policy on which the denial of the claim may have an impact; and
3. 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.

Question 18

What is the fundamental principle of common law in relation to privity of contract?

Answer 18

No person can sue or be sued on a contract unless they are party to it.

Question 19

What are the four common law methods of circumventing the doctrine of privity of contract?

Answer 19

1. Agency-this occurs where one party, the agent, is authorised either expressly or by implication, by the principal, to contract on behalf of the principal.
2. Assignment-the legal transfer of a contract’s rights, obligations and responsibilities from one party to another.
3. Collateral contract-Court may find a collateral contract between the promisor and a third party as seen in Shanklin v Detel Products Ltd (1951)-warranty by D that their paint would last for 7 years and instruction by the C to contractors to buy the paint to paint the pier.
4. Actions in tort-neighbour principle as seen in Donoghue v Stevenson (1932).

Question 20

What is the Contracts (Rights of Third Parties) Act 1999?

Answer 20

A statutory exception to the doctrine of privitiy that allows a party, in limited circumstances, to enforce a term of contract to which it is not a party. This is the case even if the third party has not provided any consideration.

The Act does not, however, allow a contract to be enforced against a third party.

Question 21

In what circumstances may a third party enforce a term of a contract to which they are not a party under S1(1)(b) Contracts (Rights of Third Parties) Act 1999?

Answer 21

S1(1)(b) sets out the circumstances in which a third party may enforce a term of a contract to which they are not a party:

(a) the agreement purported to confer a benefit on the third party; and

(b) It was not the case that the contracting parties did not intend the term to be enforceable by the third party

Question 22

Does a third party need to be expressly identified in the contract in order for them to enforce a term of the contract under the Contract (Rights of Third Parties) Act 1999?

Answer 22

Yes, and this can be by describing a class of people. The third party does not have to be in existence at the date of the contract so the right can be conferred on an unborn child for example.

Question 23

How may parties avoid any third parties having any rights under the contract?

Answer 23

They can include an exclusion of third party rights clause and rely on exemption/limitation clauses.

Question 24

What is the extent of a third party’s rights under the Contract (Rights of Third Parties) Act 1999?

Answer 24

The third party’s rights will never be greater than they would have been had the third party been a party to the contract.

Question 25

What does S2(1) Contract (Rights of Third Parties) Act 1999 state in relation to consent?

Answer 25

S2(1) states that when a third party has a right to enforce a contract term, the contracting parties cannot change or cancel the contract without the third party’s consent:

-The third party has told the promisor that they agree to the term

-The promisor knows that the third party has relied on the term

-The promisor could reasonably be expected to know that the third party would rely on the term

Question 26

What does S5 Contract (Rights of Third Parties) Act 1999 state in relation to double liability?

Answer 26

S5 protects the promisor from double liability. This means that if a third party is able to enforce a contract term, and the promisee has already recovered a sum from the promisor, the court will reduce the award to the third party.