Week 6- Mistake and frustration Flashcards
What is a common mistake, what effect does it have on the parties, and how does it differ to frustration?
Parties may be relieved of their contractual duties in the event of the common mistake, even where they have come to an agreement- instead, an event occurs which was unforeseen by the parties at the time that the contract was concluded. The courts must decide who bears the risk of this event.
A contract may be set aside where parties enter into contract under a common/ mutual mistake at the date of the entry into the contract. Equally, where an event occurs out of the control of the parties after the contract is concluded, which makes it illegal or impossible to perform, this is known as frustration. The frustration refers to the execution of the contract whilst common mistake occurs in the formation of the contract.
Facts of Bell v Lever Bros 1932?
Facts- Defendants, B and S, entered into a contract with the claimants under which they agreed to serve for five years as chairman and vice-chairman respectively, of a subsidiary company of the claimants. One term of contract was that the chairmen were not meant to make profit for themselves, by doing business on their own account whilst working for this company. The defendants secretly made profits which they withheld from the claimants; in re-organising the company, the company paid off Bell and Snelling £30,000 and £20,000 each, and later found out about the breach of contract; such a breach would have allowed the company to terminate the service agreement without paying out to the defendants, so they sought to recover their £50,000.
What is the long-standing significance of Bell v Lever Brothers, especially in relation to the strict test laid down by Lord Thankerton?
Significance- House of Lords held, by a majority of three to two, that the claimants could not recover the money. Lord Atkin and Thankerton held it was not a sufficient mistake capable of avoiding the contract, whilst Lord Blanesburgh held that they did not plead common mistake (having been introduced so late on, but still in agreement with the other two lords. No equitable remedy was appropriate either, despite the later case of Solle and butcher, which cannot be reconciled with this case (a House of Lords case). The mistake was as to the ability of the company to terminate the contracts without paying out “golden parachutes” due to the breach of contract by the chairmen.
Lord thankerton’s test: common mistake must “relate to something which both parties must necessarily have accepted in their minds as an essential element of the subject matter” Policy reasons for holding the contract as valid and unavoidable suggest that the court cannot step in to rectify a bad bargain, and that the jurisdiction of a court to void a contract for mistake was reserved for only exceptional cases.
“The mistake was not as to the existence of agreements which required termination - for such did exist - but as to the possibility of terminating them by other means.” “The phrase “underlying assumption by the parties,” as applied to the subject-matter of a contract, may be too widely interpreted so as so include something which one of the parties had not necessarily in his mind at the time of the contract; in my opinion it can only properly relate to something which both must necessarily have accepted in their minds as an essential and integral element of the subject-matter. In the present case, however probable it may be, we are not necessarily forced to that assumption. In the present case the terms of the contracts throw no light on the question, and, as already indicated, I do not find sufficient material to compel the inference that the appellants, at the time of the contract, regarded the indefeasibility of the service agreements as an essential and integral element in the subject-matter of the bargain.”
Lord Atkin held, at p. 218: “a mistake will not affect assent unless it is the mistake of both parties, and is as to the existence of some quality which makes the thing without the quality essentially different from the thing as it was believed to be.” This seems to be concurrent with the speech of Lord Thankerton.
How did Solle v Butcher, and Steyn J in Associated Japanese bank, interpret Lord Thankerton’s strict test?
Thankerton’s GENERAL test lays down the principle that finding a common mistake must pass a very high threshold to be considered capable of ignoring the contract. In Solle v Butcher, this case was considered to only be authority for common mistake as a matter of mistake at law, rather than a mistake of fact.
Steyn J in Associated Japanese bank suggests that the reasoning for employing such a high threshold in this case is that the mistake was not as significant as expected because the claimants were worried about reorganising the company and being capable of securing the consent of the chairmen- they may have entered into the same agreement even if they knew about the breach of contract, because they were already tentative and cautious in their decision.
What is common mistake as to the subject matter of a contract and how is it shown in Couturier v Hastie?
Facts- There was a transit of corn between from C to H, going from the Mediterranean to the UK, the corn having already decayed and subsequently sold prior to delivery to the UK, because it had got so hot and fermented that it was unsafe to deliver any further, unknown to both parties at the time that the contract was made. C argued that in handing over the shipping documents, he had done all that he was required to do under the contract- he was suing for the price of goods which he was unable to deliver. He thought that payment was due upon handing over the documents.
Significance- C argued that H should pay for the corn because he had acquired an “Interest in the adventure”. The court held that the contract was void because the corn was not in existence at the time which the contract was concluded. Lord Cranworth L.C. said:
“The whole question turns upon the construction of the contract… Looking to the contract… alone it appears to me clearly that what the parties contemplated… was that there was an existing something to be sold and bought.”
“a vendor of goods undertakes that they exist”- suggests that this was merely a case of construction rather than common mistake. It therefore should not be considered as a case of common mistake, and this reasoning was applied in the Australian case of McRae v CDC.
Court of Exchequer: Pollock CB said “the question is purely one of construction. I certainly think that the plain and literal meaning of the language here used imports that the thing sold, namely the cargo, was in existence and capable of being transferred”
Facts of the Great Peace Shipping 2002?
Facts- Defendant chartered vessel to give assistance on basis of wrong information about its location - Defendant cancelled contract and declined to pay - Contract not void at common law for mutual mistake - Vessels not so far apart as to make contractual services which could have been provided substantially different from contractual services envisaged by parties - No equitable discretion to rescind for mistake contract which was valid at law. 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. The defendants, having failed in the argument for mistake, pleaded that there should be an equitable remedy, where the common mistake was not significant enough to render the contract void.
In increasing the strictness of the test laid down by Lord Thankerton, what 5 principles did Lord Phillips lay down for common mistake in The Great Peace?
What principle laid down in Solle v Butcher did this case reject?
Lord Phillips- appeal dismissed, the defendants were liable to pay for breach of the contract.
- . “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.”
- “it suggests that the following elements must be present if common mistake is to avoid a contract. (i) there must be a common assumption as to the existence of a state of affairs; (ii) there must be no warranty by either party that that state of affairs exists; (iii) the non-existence of the state of affairs must not be attributable to the fault of either party; (iv) the non-existence of the state of affairs must render performance of the contract impossible; (v) the state of affairs may be the existence, or a vital attribute, of the consideration to be provided or circumstances which must subsist if performance of the contractual adventure is to be possible.”
Also, it must be understood that rescission for common mistake on the grounds of equity is impossible unless the mistake is fundamental, or at least it was following Solle v Butcher, up until Great Peace.
What policy reasons are there for using a strict test in common mistake and rejecting the more flexible approach of equitable remedies?
- Firstly, as a matter of principle, The Great Peace had to reject the confinement of Bell v Lever bros to just mistake at law rather than mistake of fact, which Solle v Butcher tried to confine it too. IN doing so, and rejecting the approach in Solle v Butcher, it increased the consistency in the law between Great Peace and Bell v Lever Bros.
- Clarity and consistency in their own right are strong policy reasons
- The encouragement of performance in contracts by the courts, they should not be stepping in to correct a bad bargain made by one party; the freedom of contract doctrine is the underlying theory here.
- Equitable remedies merely undermine any doctrine laid down in Lever Bros or Great Peace shipping; if they can’t proceed under the common law but then an equitable remedy just steps in place, this makes the common law redundant; a statute given due parliamentary consideration should play this role if a more flexible approach to common mistake is to exist
- The apportionment of risk in the case of mistake: “Where, however, the parties agree that something shall be done which is impossible at the time of making the agreement, it is much more likely that, on true construction of the agreement, one or other will have undertaken responsibility for the mistaken state of affairs. This may well explain why cases where contracts have been found to be void in consequence of common mistake are few and far between.”
How has common mistake been treated in more modern cases such as Brennan v Bolt burdon?
What are the facts of the case?
Brennan v Bolt burdon 2004 EWCA Civ 1017:- it’s now suggested that common mistake has been reduced so much from Bell v Lever bro’s to the point in this case that there must be impossibility to perform the contract at the time of the creation of the contract to render it void for common mistake- this coincides with the reduction of equitable remedies available for mistake, following Great Peace shipping ltd.
Facts- Local authority appealed against the HC decision that a compromise of proceedings (a way that parties avoid legal proceedings with each other by entering into a contract on settled terms) which the respondent had entered into on the basis of a common mistake was void by reason of that mistake. The authority was one of three defendants in a personal injury claim, the plaintiff being a local authority tenant who complained of Carbon monoxide poisoning from the failure of the local authority’s failure to maintain a boiler.
-The common mistake which the defendants suggested existed was that the defendant had struck out the claim to settle the compromise because it was done outside of the limitation period, when in fact it was 4 months within the limitation period. They believed the claim form was not validly served (both parties) due to the judgement of the recorder- Morland J dismissed the appeal in the lower court because of this alleged common mistake.
Significance- The appeal was allowed, and compromises, like other contracts, could be void by reason of common mistake only if it rendered performance impossible (legally or physically/factually). In the case of the council, there was no mistake of law or impossibility and the compromise remained performable throughout, even though it was at the disadvantage of B. There was no true mistake of law, rather one of doubt about the law and the possibility of executing the compromise. A mistake of law would however allow the council to seek relief.
- Maurice Kay LJ: “(1) As with any other contracts, compromises or consent orders may be vitiated by a common mistake of law. (2) It is initially a question of construction as to whether the alleged mistake has that consequence. (3) Whilst a general release executed in a prospective or nascent dispute requires clear language to justify an inference of an intention to surrender rights of which the releasor was unaware and could not have been aware ( Ali’s case), different considerations arise in relation to the compromise of litigation which the parties have agreed to settle on a give-and-take basis: see the Huddersfield Banking case. (4) For a common mistake of fact or law to vitiate a contract of any kind, it must render the performance of the contract impossible: see Great Peace Shipping Co Ltd v Tsavliris Salvage Ltd [2003] QB 679 .”
Facts and significance of Solle v Butcher 1950?}
What was Lord Denning’s test for allowing equitable remedies?
Facts- The demised premises, a flat, had been let in 1939 at a standard rent of GBP 140 a year, and in repairing war-damage the landlord had made substantial alterations to the flat. Had the necessary notices been served, the increase in respect of improvements permitted under s.2(1) of the Act of 1920 would have brought the rent up to approximately GBP 250 a year, but the landlord and the tenant, who was a surveyor and a partner with the landlord in a firm of estate agents, were satisfied that the reconstructed flat was not subject to the previous standard rent of GBP 140 a year, and no notices were served. On completion of the work, the landlord let the flat, together with a garage which had not been previously demised, on a seven years’ lease at GBP 250 a year. Subsequently, the tenant sought a declaration that the standard rent was GBP 140 a year and claimed repayment of the amount overpaid.
Significance- Equitable remedy allowed the Landlord to set aside the lease due to a mutual mistake which was fundamental and in no way attributable to the Landlord.
“Held, that the lease must be set aside: by Bucknill L.J., on the ground that both parties having, in his opinion (contrary to that of the county court judge) addressed their minds to the question whether the flat had changed its identity, the mistake which each had made was that the work done made such a substantial alteration to the building as to make it a different flat - a common mistake of fact; and by Denning L.J., on the ground that the parties had executed the lease under a common mistake in that each thought that the flat was not tied down to the controlled rent of 140l. a year, whereas in fact it was.
Per Denning L.J. A contract was liable in equity to be set aside, if the parties were under a common misapprehension either as to the 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.
What policy factors does Cartwright make in favour of allowing equitable remedies, in particular in reference to its’ relative flexibility compared to the common law?
“The common law gives a remedy for common mistake, but it is granted only in very limited circumstances–essentially, only in those circumstances where the facts turn out to be such that one party can be said to fail to receive the essential benefit which the contract contemplated. This attitude was taken by the House of Lords in Bell v. Lever Brothers on the basis that contracts should be preserved as far as possible, and that parties should not be allowed to extricate themselves simply because they have made a bad bargain. In a sense, the development of a new wider equitable jurisdiction in Solle v. Butcher has side-stepped one of the *L.Q.R. 622 problems; since rescission is a discretionary remedy, there is no longer a “black and white” answer to an allegation of mistake. If the common law is called upon to give a remedy, it can only say either “void” or “valid.” Equity gives a wider choice, in that a decision that the mistake is operative does not lead inexorably to a remedy. In the few cases in which rescission for mistake has been sought and granted since Solle v. Butcher, the courts have not necessarily simply torn up the contract. Where appropriate, they have used the power to impose terms, in order to rewrite the contract, so far as possible, as if the mistake had never been made.136 But it can certainly well be maintained, on the arguments elaborated in this article, that interference by the courts in contracts should be limited to those situations where either there is a failure of consideration or there is an imbalance, built into the transaction by virtue of the conduct or position of one party vis-à-vis the other party at the time when the contract was made.”
What is a unilateral mistake?
This type of mistake negatives a contract because one party is labouring under a mistake, and this in turn negatives the requisite consent of a contract- there is an objective approach to agreement, so that where one party is mistaken as to the contract, this in itself is not sufficient for negating the contractual agreement.
What three types of unilateral mistake are said to exist?
1) Where the terms of the offer and acceptance suffer from such “latent ambiguity” that it is impossible to reasonably impute any agreement between the parties at all.
2) Where one contracting party is mistaken as to the terms of the contract, and that mistake is known to the other contracting party. The party who is aware of the mistake of the other party cannot enforce his own understanding of the term against the mistaken party, as per Hartog v Colin and Shields.
3) Where there is a mistake as to the identity of the parties- the identity often is immaterial, eg where someone purchases something from a shop, the shop owners tend to be indifferent as to the identity of the customer. The main problem in this area of unilateral mistake arises where the customer sells the purchased goods to a third party who pays for the goods in good faith, unaware of the fraudulent action in the previous transaction.
facts and significance of Raffles v Wichelhaus, and Smith v Hughes 1871?
What two types of unilateral mistakes do these two cases show respectively?
1) Where the terms of the offer and acceptance suffer from such “latent ambiguity” that it is impossible to reasonably impute any agreement between the parties at all.
Raffles v Wichelhaus 1864 2 H&C 906:
Facts- Defendants agreed to buy from the claimants a cargo of cotton to arrive ‘ex peerless from Bombay’; unknown to the parties there were two ships with the name peerless which also sailed from Bombay. Defendants were contracting for peerless which sails in October whilst plaintiffs meant the one which sailed in December. The plaintiffs sought to recover the price of the cotton as they received the cotton on the peerless in October whilst expecting the cotton on the peerless in November.
Significance- The court held that the defendants were not liable for the price of the cotton- the parties were at cross-purposes and the plaintiffs could not sue for recovery of the cotton price. No substantial reasons given for this decision.
2) Where one contracting party is mistaken as to the terms of the contract, and that mistake is known to the other contracting party. The party who is aware of the mistake of the other party cannot enforce his own understanding of the term against the mistaken party, as per Hartog v Colin and Shields.
Smith v Hughes 1871 LR 6 QB 597
Facts- A seller offered to sell some oats to the buyer. The buyer believed these oats to be old oats, which were required for the purposes for which he purchased the oats, but the oats were in fact new oats. The first court found in favour of the buyer for this mistake, but a re-trial was ordered on the basis that the buyer will be under different obligations depending on the knowledge of the buyer. IN the first situation, the buyer may correctly realise that the seller is selling oats, but the seller may know that the buyer expects these to be old oats but having made no representation of these oats being old. In this case, the seller is under no obligation to inform the buyer of his mistake. In a second situation, the buyer may be mistaken as to the terms of the contract, mistakenly believing that the seller is selling old oats, and the seller being aware of this mistaken belief. Here there is an obligation on the seller to inform the buyer that he is mistaken as to the terms of the contract and failing to do so will see the court rule in favour of the buyer.
Cockburn CJ: “It only remains to deal with an argument which was pressed upon us, that the defendant in the present case intended to buy old oats, and the plaintiff to sell new, so the two minds were not ad idem; and that consequently there was no contract. This argument proceeds on the fallacy of confounding what was merely a motive operating on the buyer to induce him to buy with one of the essential conditions of the contract. Both parties were agreed as to the sale and purchase of this particular parcel of oats. The defendant believed the oats to be old, and was thus induced to agree to buy them, but he omitted to make their age a condition of the contract. All that can be said is, that the two minds were not ad idem as to the age of the oats; they certainly were ad idem as to the sale and purchase of them.”
What is the situation where a thief/ rogue takes from a seller, defaults on his payment, and subsequently sells to a good faith third party? How does mistake and the law of contract come to the rescue of the seller?
In general, English law in this area deals on the maxim that “you cannot give what you do not have”. The rogue cannot pass rights which he himself did not acquire through his theft from the seller. The contract between the seller and thief/ rogue is defective and can be set aside for mistake, which renders the contract void; this is advantageous over pursuing a claim for fraudulent misrepresentation (although in reality this embodies the whole transaction) because this only renders the contract voidable. The seller won’t be able to set aside the contract before the rogue sells to the third party, so mistake is a more equitable route by which the seller can claim against the good faith third party, who under a contract made by mistake has acquired no rights which he can pass on to the third party, and therefore ownership has remained with the seller throughout, despite the third parties’ justifiable yet mistaken belief that he has acquired rights in the goods in good faith.
