The doctrine of mistake

Question

The purported basis of the doctrine of mistake is that contracts within law are about agreement, consensus ad idem,  when which all parties involved have a uniform understanding of the terms to the agreement, such comprehension is crucial to maintaining a valid contract. The doctrine of mistake is a grounds for setting aside a contract, the term “mistake”, in a legal context retains a much narrower sense than in common usage. With this however not every mistake renders a contract void. The effect of the mistake may be to prevent the formation of the initial contract, such as when the parties involved are at cross-purposes; however the fact a mistake has been made is not sufficient of itself to set aside the contract. The reason for this is that the law adopts an objective approach rather than a subjective approach to the agreement. In some instances a contract is initially created, however later may be set aside by the court, whereas in other cases, the conclusion of the court is that as a result of a participating factor, the involved parties cannot be shown to have formed a contractual relationship. It is commented that “The words 'set aside' may not naturally encompass the latter case because it can be argued that in these cases there is no contract to 'set aside'.”

The law relating to the influence of the doctrine of mistake upon the validity of a contract is difficult to interpret, especially when considering the problem of terminology when classifying the different types of mistake covered within the doctrine. The terminology is often used somewhat interchangeably by courts and commentators alike and can be shown to be inconsistent. The typical terms utilized to describe the different types of mistake are mutual, common and unilateral. 'Common' mistake refers to a case in which both parties are mistaken and have both made the same mistake in conjunction with the contract. 'Mutual' mistake gives explanation to how both parties are mistaken. 'Unilateral' mistake is where only one of the parties is mistaken as to the terms, while the other party may be aware of the mistake.

Unilateral mistakes frequently involve cases of mistaken identity, the customary case is one in which party (A), intends to contract with (B), however due to (B)'s fraudulent misrepresentation (A) in fact enters a contractual relationship with (C), a rogue. Invariably (C) may then form a contract with (D). The question therefore develops of who is to bear the risk arising from the transactions, (A) or (D). Addressed by Adams and Brownsword, (C) would take goods on credit, and then consequently fail to pay, and sell them to an innocent third party, (D), who is unaware of the prior deception. “On the face of it, this should not give rise to great legal agonising because (A) has a remedy against (C) for fraudulent misrepresentation or for damages for breach of contract. In practice, however, (C) has a habit of disappearing without trace, or appearing without funds, and (A) is left attempting to recover goods from (D).” Adams and Brownsword, further, to explain how the line of argument of (A) is that the apparent agreement with (C) was illusory as it was founded on a mistake of identity, in consequence it can be shown that property in the goods did not pass to (C) and in passing (C) could not transfer property to (D). This creates a dilemma for the court, either protect the seller, (A), and render the contract void due to mistake as to identity and fraudulent representation on the part of (B) that he or she is (C), or protect the third party,(D) and render the contract voidable on the grounds it was entered into as a result of (B)'s fraudulent misrepresentation.

Further, unilateral and mutual mistakes are regarded as 'agreement mistakes', in relation to this it is important to question whether there is an agreement. With common mistake on the other hand, which Mulcahy and Tillotson regard as a “possibility mistake”, the significant question is whether the agreement stands. To satisfy these questions, it is important to derive a distinction between contractual ideologies.

The law relating to that of mistake of identity is in a state of instability, the law must strive to attain a balance between the need for certainty and also fairness. With reference to fairness in particular, the law must provide satisfactory precautions of protecting the interests of a party who has entered into a contractual relationship which is diverse in nature from which he or she intended to enter. For certainty within transactions, this would demand a narrow doctrine of mistake, whereas a more liberal approach would be required for the latter.

To address the tension between calls for fairness and that of certainty, within the areas of mistaken identity, a concise understanding of contract theory is relevant, particularly formalism, realism, market individualism and consumer welfarism. Formalism and realism are general judicial approaches which construct the theoretical framework, “irrespective of the substantive area of law concerned (i.e. Contract or otherwise).” Adams and Brownsword observe that these two “approaches are 'ideal-typical' in the sense that we can conceive of them without either inspecting judicial practice or supposing that they will be fully instantiated therein.”

Formalist ideology revolves around the rule-book, the rule book will be treated as decisive, even when the result is seen to be unsympathetic upon one party. The rule book is seen as a closed logical system, formalists view contractual concepts as having a logic of their own. “Freedom of contract and sanctity of contract are cited without critical reflection on their doctrinal purpose”, or the social context in which they are to be applied.”, this reflects how formalism applies the rule book without foresight of the implications upon the parties involved, negating fairness in a manner, however creating certainty within the law. Realism is the converse of the formalist ideology. The rule book is not decisive, it follows that the primary aspects of a case are the facts and the decision with rules as a secondary consideration. For realist judges sympathy and political reasoning are broadly employed, if judges ignore the merits of a case, practical justice is somewhat abandoned. Hence this ideological concept provides flexibility and the results often gravitate towards a more fair and just approach to the law of mistaken identity.

As mentioned realism and formalism are general judicial attitudes to contractual ideology whereas market individualism and consumer welfarism are particular ideologies, specific to contract law, which dominate realist contractual thinking in practice. Market individualism comprises of two elements, the market philosophy and the individualist philosophy. The market ideology sees the function of the law of contract as the facilitation of competitive exchange. This demands concise contractual rules and security in transactions, of which, emphasis is placed upon. The individualist ideology focuses upon the sanctity on contract and the freedom of contract, which allows parties licence in setting their own terms and to hold parties to their freely made bargains. Consumer welfarism, in plain expression, stands for fairness and reasonableness in contractual relationships, the interests of the consumer are taken seriously, primarily employing a policy of consumer protection. Despite this policy of consumer protection, it lacks the unity and coherence of market individualism. Within this ideology it is held that contracts should be closely regulated, unlike the individualist premise of minimal regulation.

As stated the law relating to mistaken identity within unilateral contractual agreements, creates a dilemma for the court, in that, they have to conclude whether to render the contract void due to mistake as to identity or render the contract voidable on the grounds it was entered into as a result fraudulent misrepresentation. “According to the pre Shogun Finance case law the existence of a contract between the claimant and the rogue had depended upon whether those parties had dealt with each other face to face or whether they had dealt with each other by correspondence.” With the existence of a contract that has been reduced to writing, it is suggested that the contract between (A) and (B) may indeed be void for mistake due to (A) having the understanding he or she retained a contractual relationship with (C). However when the contract had been made orally, the prima facie presumption which the law applies is that the person intends to contract with the individual in front of them and can only be displaced in certain circumstances, this assumption does not apply to written contracts. McKendrick comments that “not everyone is convinced that the law should distinguish in this way between written contracts and oral contracts but the distinction was affirmed by the House of Lords, albeit by a bare majority in Shogun Finance Ltd v. Hudson [2003] UKHL 62; [2004] 1 AC 919.” Despite this, it is significant to note the contrasting decisions by the courts in particular cases which precede Shogun due to the controversy.

Firstly it is important to observe the cases preceding Shogun which involved inter absentes contracts. In the case of Cundy v. Lindsay, a rogue, named Alfred Blenkarn ordered handkerchiefs from a manufacturer, Lindsay & Co. Under the pretence that Alfred Blenkarn was in fact a reputable firm with a similar name, 'Blenkiron & Co', the manufacturer delivered the goods on credit to Alfred Blenkarn, who had also given a similar address to that of the reputable company of ‘Blenkiron & Co'. Before the discovery of the rogues' true identity, the goods were transferred to an innocent third party, Cundy, who bought them in good faith. The House of Lords held that no contract had been concluded between Lindsay and Blenkarn due to mistake of identity and since Blenkarn had no title to the goods, it was deemed impossible for Cundy to hold a title. Cundy was therefore held liable to the plaintiffs for the value of the goods. However it is not held in every case that a mistake of identity will render a written contract void, in this respect it is beneficial to note the contrasting decisions in Cundy and King's Norton. A rogue assumed the name of Hallam & Co and dealt through written correspondence with the plaintiffs. The rogue received goods on credit and sold them to the defendant in good faith. When the fraud was discovered the decision from Cundy was relied upon, however their claim failed. A L Smith stated that : “[I]f it could have been shown that there was a separate entity called Hallam &Co, and another entity called Wallis then the case might have come within the decision in Cundy v. Lindsay.” The innocent third party had acquired a title as the contract stood, although been voidable for fraud. Contrasting with Cundy it is possible to see how there was a mistake, however only concerning attributes not identity.

As discussed the prima facie presumption which the law applies to inter praesentess made contracts is that both parties intended to contract with each other as it would be difficult to distinguish between those who were genuinely mistaken and those seeking to evade a bad bargain. However, in reviewing the case law surrounding this aspect, it is apparent that there is no constant parallel in the decisions regarding fairness or certainty. In the two principal cases, Phillips v. Brooks and Lewis v. Averay, the contract was held to be voidable. The decision of Horridge J in Phillips, concluded that contract was not void for mistake because the plaintiff was found to have had the intention of dealing with the person in front of him despite the rogue obtaining the goods by false pretences. This decision was later followed in Lewis. The restrictive approach in both Phillips and Brooks reflect a market individualist perspective focusing on the security of transactions.

However Phillips was distinguished by the Court of Appeal case of Ingram v. Little. The plaintiffs advertised a sale of their car and were approached by a rogue posing under the name of one Mr. Hutchinson, residing at Stanstead House, Caterham. After refusing a cheque for the sum of £717, one of the plaintiffs visited a local post office to confirm his identity in the telephone directory. The plaintiffs decided to take the cheque, however this was subsequently dishonoured after the rogue had bestowed the car upon an innocent third party. The court of Appeal held by majority that the contract was void due to mistake of identity, despite the prima facie presumption held in Phillips. This was displaced as it was held the decisive factor was how the plaintiffs refused to accept payment by cheque until they could confirm his identity; with this, the identity was seen as fundamental.

Concerning Ingram, since the innocent third party has held to have no title of the goods and had to return them, market individualists would view this as irregular, especially due to the decisions of Phillips and Lewis that followed a market individualist premise and the fact that it is unclear why the innocent person should lose out. Adams and Brownsword observe that the only reasonable explanation is that the majority judges were operating “within a consumer welfairist framework”, and that the innocent person in this case, being a car dealer was a more appropriate loss-bearer, whereas in the other cases, the loss-bearers were of equal standing.

The case-law following was evaluated by Brooke LJ as being in a 'sorry condition' and by Sedly LJ as involving “illogical and sometimes barely perceptible distinctions ... representing an unarticulated judicial policy on the incidence of loss between two innocent parties.” Further, McKendrick observes that the distinction between cases involving inter absentes and inter praesentes contractual relationships in previous cases, “was not always drawn with great clarity in English law, but in the light of the decision of the House of Lords in Shogun Finance Ltd v. Hudson it now assumes considerable significance in English Law.” Hare argues that Shogun provided the House of Lords an “opportunity to bring order to this area.”

In Shogun a motor dealer agreed to sell a car to a rogue, who produced a stolen driving license as proof of his identity, belonging to a one Mr. Durlabh Patel. The dealer faxed a copy of the driving license and a draft copy of the hire- purchase agreement to the claimant finance company, which had been fraudulently signed. The claimant confirmed the credit check and approved the sale, the rogue paid a 10% deposit and was permitted to drive the car away that day. Prior to the discovery of the rogues' identity, the car was sold to an innocent third party in good faith, one Mr. Hudson. The House of Lords, by majority, upheld the conclusions of the Court of Appeal, and held the claimant was entitled to delivery up of the vehicle or damages for its conversion. The defendant claimed that he acquired a title to the car as a result of the operation of the Hire Purchase Act 1964. However, with reference to the Hire Purchase Act, it was determined that the rogue was not the 'debtor', and that any contract formed was between the finance company and Mr. Durlabh Patel. The defendant also maintained that the dealings between the rogue and the claimant were inter praesentes , as they had dealt with each other through the medium of the car dealer, a majority rejected this claim in accordance with Branwhite.

The majority decision given by Lord Hobhouse, adopts a formalist approach, and affirms the accuracy of Cundy. The majority looked at the “formalistic issue of identifying the legal category in which [the] dealings fit”, therefore a distinction was made between contracts made in writing and contracts made orally. Since the written document identified Mr. Patel as the buyer there could be no valid contractual relationship between the seller and the rogue.

In the contrasting minority, Lord Nicholls and Millet adopt a distinctly realist approach, and focused more on the substance of the dealings and noted that the distinction between inter praesentes contracts and other are unrealistic. Dissenting, it is commented that “where the choice has to be made between two innocent parties, loss is more appropriately borne by the person who takes the risk inherent in parting with goods without receiving payment.” This would ensure greater fairness in the law, particularly for the third party. Hare comments how the “minority's approach would lead to greater consistency in English contract law”

The law relating to mistaken identity is arduous and this is complicated further by the contrasting decisions of case law. Hare views the decision in Shogun as a failed opportunity to clarify the law. However even after Shogun it may be the case that the current inconsistencies present in this area of law is due to the “competing ideologies of contract law” which noticeably affect certainty and fairness in decisions.