Mistake, Discharge and Breach in Contract Law

Question 1

a) Advise Sonia as to whether there is still a binding contract between her and Boris.

Mistake in contract law is an incorrect understanding by one or more parties to a contract and may be used as grounds to invalidate the agreement. Common law has identified three different types of mistake in contract: unilateral mistake, mutual mistake, and common mistake.

A unilateral mistake is where one party is aware of the other party’s mistake; these types of contracts are void as there is no adjoining link between the offer and acceptance.

A mutual mistake is where both parties are at cross purposes, for example where one party is offering one thing whereas the other party is accepting something else.

Mistake at common law arises where both parties have made the same mistake which affects the basis of the agreement and a fundamental fact of the contract. This is also known as common initial mistake.

In Sonia and Boris’s case the type of mistake that has been made is common mistake.

In most cases where common initial mistake is concerned it is rare to see a contract resulting in a void. This judgement is usually left to equity which would provide a remedy which is seen to be fit.

Although this is usually the case, even so, common initial mistake has been broken down into three conditions.

These three areas are mistake as to the existence of the subject matter, mistake as to title and also mistake as to the quality of the subject matter of the contract. Mistake as to the existence of the subject matter is when oblivious to both parties the subject matter was non existent at the time the contract was entered into. This form of mistake is also referred to as res extincta.

Mistake as to title is referred to as res sua which has been described by Lord Atkin in Bell v Lever Bros as:

“Corresponding to mistake as to the existence of the subject matter is mistake as to title in cases where, unknown to the parties, the buyer is already the owner of that which the seller purports to sell to him. The parties intended to effectuate a transfer of ownership: such a transfer is impossible: the stipulation is naturali ratione inutilis.”

Out of the three forms of common initial mistake which have been referred to, the most applicable to Sonia and Boris’s scenario is mistake as to the quality of the subject matter. Mistake as to the quality of the subject matter of the contract, generally means whether the contract can be void if the subject matter of the contract in reality does not have the quality it is believed to be had by the parties of the contract. At the same time it should be borne in mind that these tests are very vague and as discussed further the distinctions between each test aren’t very clear. Also in these cases the courts are not concerned whether either party is at a bad bargain due to the changes in the quality of the subject matter.

This type of common mistake is most applicable to Sonia and Boris’s situation because at the time the contract was made the agreed price was £575, but once it was discovered by Sonia that the painting was an Atkinson Grimshaw which gave it an increased value of £250,000 she refused to sell the painting.

A case representing mistake as to the quality of the subject matter of contract is that of Bell v Lever Bros. In this case an appellant was employed on a fixed term contract. His role was of the chairman in a subsidiary company of the respondents. The appellant’s role was no longer required due to respondents deciding to merge the subsidiary with another company. Although this decision was made there was still some time left for the appellants contract to expire, due to this the respondents decided to pay the appellant £50,000 for terminating his contract earlier. Although this decision was made it was later found that the appellant had been involved in some speculative deals which could have meant he could have been dismissed without any compensation. Once the truth was found out the respondents sought to recover the money compensated to the appellant, at first it was found that the appellant concealing his breach of duty wasn’t deceptive and not mentioning it wasn’t a relevant factor with regards to the situation. In the House of Lords it was held that the contract was not void, and only a mistake as to quality had been made, the contract was still valid and binding. In relation to mistake as to quality in the Bell v Lever Bros case Lord Atkin stated that it:

“Will not affect assent unless it is a 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 it was believed to be.”

The decision made in this case was also made similarly in the case of Solle v Butcher. Also in the case of Oscar Chess Ltd v Williams the contract remained binding as it was said that a contract for the sale of a car would not be void because the parties made a mistake as to its age, so that the buyer would have paid more than he would have done, had he known the truth.

Similarly in Sonia and Boris’s cases, the painting was believed to be by an unknown artist and a price had been agreed which was £575, her refusal to deliver once she had discovered that it was an Atkinson Grimshaw bears resemblance to the situation in Bell v Lever Bros, where Lever Bros decided to recover the money once finding out that compensation was not necessary.

Boris only wanted the painting and that’s what he was going to receive therefore there had been no mistake as to the quality of the subject matter; it still remained a painting. This also bears resemblance to the case of Oscar Chess Ltd v Williams where the contract could not be made void once discovered that due to the age of the car more money could have been recovered from the contracting party.

Another case which is similar is Leaf v International Galleries; in this case both parties were under a contract for the sale and purchase of a picture which both thought to be by Constable. Later the plaintiff realised that it wasn’t painted by Constable and the plaintiff based his claim as misrepresentation, but if the claim had been based under common mistake, it would fall under Lord Atkins test which stated above:

“Is a 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 it was believed to be.”

Under Lord Atkin’s argument A thinks that they are buying a painting from B and that’s what they received which amounts to no mistake. Similarly in Sonia’s case Boris entered into the contract to purchase the painting and that still remains the case, therefore with Lord Atkin’s argument in mind Sonia is still bound by the contract under common law.

Overall the cases and judgements have been based on common law, which have all concluded in the cases not being voidable. Therefore Sonia is still bound by the contract, as the painting still remains a painting, and just because Sonia would overall be at a bad bargain isn’t a sufficient reason for the contract to be void. If both parties were to be asked ‘what they were contracting over’… the obvious answer from both parties would be ‘a painting.’ This general principle is sufficient enough for the contract still remaining a valid one.

b) Advise Sonia as to the possible methods by which the contract between her and Rahim may have been discharged.

Discharge is when a contract has come to an end due to some defects in the performance of the contract. One of the parties is then free from their obligations.

In a contract it is vital that the contract is performed according to the rules that have been set out by the parties in order for it to be successful. When a party fails to do so, the innocent party can then automatically discharge themselves from the contract due to their being differences from what the initial agreements of the contract were. This also gives the innocent party the right to claim damages for the changes that weren’t necessarily agreed upon in the contract.

Discharge can be broken down into these parts which are by performance, agreement, frustration and breach.

A prime example for the discharge of a contract is in the case of Arcos Ltd v E A Ronaasen & Son where due to changes in the thickness of wood, the purchaser refused to accept it as it had made a difference to the specifications of the contract.

In Sonia’s case time was quiet a substantial part as to performance of the contract for the hire of the painting to Rahim. Rahim required the painting no later than the 1^st of January 2007 to be exhibited in his gallery on the 1^st of February 2007 and the contract was to last for 3 years. Rahim had already paid a deposit of £3000 for the painting. As it can be seen the time of performance was vital here, which was also made clear in the initial contract. Therefore the contract could be seen as discharged due to the failure to perform it on time.

Generally under common law time is regarded as being of the essence, and also under equity where time is not regarded as of the essence unless the following circumstances arise, as stated in 9 Halsbury’s Law of England:

"where the parties expressly stipulate that conditions as to time must be strictly complied with or the nature of the subject of the contract or the surrounding circumstances show that time should be considered to be of the essence or a party who has been subjected to unreasonable delay gives notice to the party in default making time of the essence."

Time was already of the essence as agreed upon in Sonia and Rahim’s situation where it was stated clearly that the painting was required no later than the 1^st of January.

The first two circumstances stated in Halsbury define what was required initially by Rahim, which was that he needed the painting in time for the exhibition and that the nature of the contract made this very clear. Otherwise the painting would have been of no use to him as it was for the purpose of the gallery opening.

A case to illustrate this is Union Eagle Ltd v Golden Achievement Ltd. In this case “The appellant entered into a written contract to purchase a flat in Hong Kong for $HK4.2 million from the respondent vendor. A deposit of 10 per cent was paid and the date for the completion of the contract was set as 30 September 1991 before 5pm. Time was stated to be of the essence and the appellant was 10 minutes late in tendering the cheques and bringing the relevant documents required to complete the purchase. The vendor’s solicitor refused to accept the cheques due to the late arrival. The court held that the purpose of the condition and the right to rescind was to give the vendor the certainty of knowledge that he could resell the property which, in a rising property market, was a valuable and volatile right”.

Therefore if the facts of Sonia and Rahims case are applied it can be seen that the contract has been discharged, for failure of performance on time.

Also it is stated in the case, that the painting, due to the damages caused, hasn’t remained the same as what Rahim had initially agreed to hire.

Also under classic law, if the rules of strict performance are followed then it can be seen the contract has already been discharged due to it not being exactly the same. Although the strict performance rule can bring about harsh consequences as in Cutter v Powell, the aim of the rule is to follow exactly what has been specified in the contract that was agreed on.

Another way in which discharge can occur is by frustration. Frustration is when performance of the contract becomes impossible due to some unforeseen circumstance or if the contract was to be performed it would be radically different.

Frustration can occur under many circumstances. The circumstances under which frustration occurs which are most applicable to Sonia and Rahims situation are the impossibility to perform and the destruction and unavailability of the subject matter.

A prime example of frustration due to destruction and unavailability is in the Taylor v Caldwell case the defendant agreed to hire a music hall to the plaintiff. After the contract was made, but prior to the day of the first concert, a fire broke out, completely destroying the music hall. By this time the plaintiffs had made extensive arrangements with regard to the productions they intended to perform. The loss of the music hall meant that their concerts had to be cancelled, resulting in substantial financial loss to the plaintiffs. The contract contained no express provisions dealing with this eventuality so the plaintiffs sued for the non performance of the contract in order to recover their losses. The defendants pleaded the destruction of the music hall through no fault of their own as a defence.

This can be applied to Sonia and Rahims situation where the painting was unavailable for its purpose when it was actually required. Therefore this could amount to a discharge of the contract.

Another circumstance under frustration is the impossibility to perform the contract. It is hard to make a clear distinction between impossibility and destruction as the result of a destruction amounts to impossibility at the same time. Therefore the doctrine of frustration under unavailability is the most applicable to Sonia’s situation and due to this the contract could also be discharged as discussed in Taylor v Caldwell.

Discharge of a contract can also be made by breach. Breach is when one party fails to perform their part of the contract, therefore due to the mitigating factors that party would be in breach. A breach of a contract can result in the innocent party claiming for damages despite of the harshness.

An actual breach occurs when there has been failure to perform the contract or the performance of the contract has been unsatisfactory, this is illustrated in the case of Poussard v Spiers where there was a failure to make a performance which had a significant impact on the main purpose of the contract. The effect of actual breach depends on the type of term that is in the contract. In Sonia and Rahims case breach has been due to primary obligation which is also referred to as a condition which was that the painting had to be received no later than the 1^st of January 2007 this had a fundamental connection to the performance of the overall contract.

It may also occur that the party may repudiate prior to the performance of the contract. A leading case on this is Frost v Knight. This is also known as an anticipatory breach but is not applicable to Sonia and Rahims situation.

An actual breach is the most applicable to Sonia and Rahims case and as a result, as well as being discharged from the contract; Rahim could also sue for damages as a result of the breach, and recover the losses he has made immediately.

Therefore the following are the ways in which Rahim could treat himself as discharged from the contract. These are Performance as to time, the application of precise performance, frustration due to the unavailability of the subject matter and also an actual breach.

Question 2

Advise Mrs Patel as to the compensation she may claim regarding her losses and distress she has suffered as a result of the various breaches of contract by Deluxe Kitchens Ltd.

A breach of contract is committed when a party without lawful excuse fails or refuses to perform what is due from him under the contract, or performs defectively or incapacitates himself from performing. A breach of contract may entitle the injured party to claim damages/ compensation and also the right to terminate the contract.

In Mrs. Patel’s case the breach of her contract means that she would be awarded compensation due to the damages caused. The main types of damages are nominal, punitive, unliquidated and liquidated. The types of damages that apply are assessed by the courts except for liquidated damages which are agreed by the parties.

Three main bases for the calculation of a loss are reliance loss, loss of bargain and restitution.

Reliance loss is when the claimant is put into the position that they would have been in if the contract was never made. This is done by compensating the claimant for expenses that were gained as a result of the breach. An example of this is in the case of Anglia Television Ltd v Reed. In this case an actor had entered into a contract with the plaintiffs, at the last minute the actor bailed out and left the whole project, leaving the plaintiffs to find another actor which also had additional costs attached to it. The plaintiffs decided to claim on items of expenditure as a result of the actor abandoning the project rather than suing on expectation loses. It is also to be noted that a claimant cannot combine the basis of their claim.

Loss of bargain is when the victim is to be put in the same position as they would have been if the obligations under the contract had been carried out; a case to illustrate this is Robinson v Harman, in this case and as stated above such damages are also referred to as expectation losses.

Restitution is not strictly one for damages. Its aim is to put both parties in the position they would have been in if the contract wasn’t made. It is more to do with gaining than for claiming for a loss. Generally, in restitution the defendant has to give up the gains made to the claimant. This is not applicable to Mrs. Patel’s case as she is claiming on the basis of the loss she has incurred.

The bases on which Mrs Patel should put her claim is under ‘loss of bargain’. This is because under this claim the injured party must prove the value of what potentially would have been the outcome which Mrs. Patel is clearly able to do.

There are a number of things that have occurred in Mrs. Patel’s case which are the defects in the kitchen, the late delivery of her cooker which resulted in her spending £2500 elsewhere for the catering of her daughters wedding, and also losing money from her part time business due to having no cooker.

A claim for loss of bargain can be assessed by difference in value and cost of cure. The distinctions between these are not easy but if the damages are quantified under difference in value the general rule under the Sales of Goods Act 1979 is that damages are awarded on the basis that is ‘the difference between the value of the goods… and the value they would have had’, however if the defects in the goods can be removed at a reasonable cost the application of this may not apply.

The defects in the kitchen can be solved by spending an extra £3000, but Mrs. Patel has already spent £15000 for the kitchen units so the extra expense doesn’t seem reasonable. On the balance of prima facie, the differences between the value of the goods and the value of the goods if they were in accordance with the contract are assessed and Mrs Patel would be compensated in that way. As a result of defective delivery the complaint is that the buyer has received something of lesser value than what was anticipated and not that a replacement of the goods will have to be bought elsewhere.

The compensation for the late delivery of the cooker will be assessed in a similar way but the complaint would not be about how a substitute had to be bought. It will be assessed on the basis of how the late delivery of the goods has been disadvantageous to him and the money recovered through this will be based on what the market value was at the time the contract was made and its market value on the day the goods were delivered. This is illustrated in the case of Bence Graphics International Ltd v Fasson UK Ltd.

The three limitations to damages are causation, remoteness and mitigation. Causation means that the breaches of the contract should have a causal link to the reasons for loss. The assessment of remoteness is that the damage must arise naturally from the course of the breach or the loss made must have been contemplated by both parties at the time the contract was made. Mitigation is how the injured party could have limited their losses to reduce damages when it was possible, and a failure to do so will not result in compensation.

However Mrs. Patel will not receive compensation for the expenses paid for the catering at her daughters wedding and also the losses made from her part time business. This was not foreseeable by the parties at the time of the contract and amounts as a limitation to damages as to remoteness. Generally plaintiffs cannot receive compensation for all losses which may come about due to the breach, as there is a possibility of the accountability being never ending. This is illustrated by the case of Victoria Laundry v Newman, where damages for further costs were also not recoverable.

Also Mrs. Patel could have bought the cooker elsewhere as she had 4 weeks during the time of her daughters wedding and when the late delivery of the cooker was discovered. This amounted as a mitigating limitation as to damages.

Overall Mrs. Patel can only get compensation due to damages for the fault in the kitchen units and the late delivery of the cooker. On the contrary Mrs. Patel cannot claim damages for the extra expense of the catering and the loss of money from her part time business as this was not foreseeable when the contract was initially entered into. Also Mrs. Patel cannot claim money for distress as this was not linked to the initial breach, and compensation for distress is only awarded in very limited situations.