Mistake Is Classified Under Common Mutual and Unilateral Mistake

Balile, a man from Meru had a business of selling mangoes to retailers in Nairobi. Later he decided to form a company by the name Bambino Mangoes Limited and transferred his business to it. He delivered the necessary documents to the Registrar of Companies and received the certificate of incorporation dated 6th April 2010. On 6th April 2010 Balile agreed to purchase a quantity of Mangoes from Kitwe Ltd in a letter which he signed for and on behalf of Bambino Mangoes Limited, Balile, Director.”

At the first meeting of the board of directors of Bambino Mangoes Limited the contract with Kitwe Limited was approved and the company took delivery of the first consignment of Mangoes. The board later found that the mangoes supplied by Kitwe limited were difficult to sell than it was anticipated since they were in the category of genetically modified foods. The board has decided to cancel any subsequent consignments from Kitwe.

REQUIRED

Advise Bambino Mangoes Limited on its liability to Kitwe Limited.

b) State with reasons, whether your answer will be the same if the two companies would have renegotiated the contract and agreed on a different price on 15th April 2010.

PART A:

As a Director of Bambino Mangoes Ltd, Balile had locus to enter the contract with Kitwe Ltd on behalf of the Company, thus there existed a valid enforceable contract between Bambino Mangoes Ltd and Kitwe Ltd.

The dynamics of the decision by the Board of Directors of Bambino Mangoes Limited (hereinafter referred to as BML) to cancel any subsequent consignment from Kitwe Limited (hereinafter referred to as KL) can broadly be viewed at in the perspectives of: –

Vitiating Elements.

Breach.

VITIATING ELEMENTS:

BML’s decision to “avoid” the Contract between KL and itself may be justified under the doctrines of Mistake (available both at Common Law and Equity) as well as Misrepresentation and Non – disclosure, all of whose effect vitiates the Contract and entitles the aggrieved party to rescind and sue for damages or restitution.

Mistake:

Mistake is classified under: Common, Mutual and Unilateral mistake.

Common Mistake:

This occurs where both parties make the same mistake with each knowing and expressly accepting the intention of the other but each is mistaken about some underlying fundamental facts.

The instant case may fall under the category of common mistake if both parties entered the agreement with the intention of trading in naturally – produced mangoes, but were both unaware that the consignments comprised genetically – modified mangoes.

The remedy in such a case would normally be restitution where each party is “restored” to the position it would have been in but for the mistake.

Mutual Mistake:

This occurs where the parties misunderstand each other and are at cross – purposes as to, for instance, the subject matter of the Contract.

The instant case may fall under the category of mutual mistake if, for instance, KL made the Contract offering to deliver the genetically – modified mangoes but BML was in the genuine belief that the offer was in respect of naturally – produced mangoes that KL also deals in.

Again, the most suitable remedy herein would be restitution.

Unilateral Mistake:

This occurs where only one of the parties is mistaken, the other knowing or reasonably taken to know of the mistake.

If BML agreed to purchase the consignment of mangoes from KL genuinely believing it to comprise naturally – produced mangoes, KL would be liable under unilateral mistake if the latter was aware of the former’s genuinely mistaken belief.

The most suitable remedy would be damages payable to BML by KL for any loss incurred by the former in reliance of the representation by the latter.

In a nutshell, mistake as shown above will in effect vitiate the Contract between BML and KL with the remedies available to each (restitution, damages) expounded as hereinabove with the reverse position (facts and consequences) holding true as well.

Misrepresentation:

Misrepresentation broadly refers to any statement of fact made by one party to another that, whilst not forming part of the Contract, actually induces the recipient of the statement to enter into the Contract in issue.

This would occur in the instant case if, say, KL represented to BML that it (KL) was in the business of and would supply BML with naturally – produced mangoes if that were not the case. It would, in turn, also amount to misrepresentation if BML agreed to purchase from KL its consignments of mangoes irrespective of the technique of production.

It is noteworthy that misrepresentation refers to a statement of fact and not a statement of intention, opinion or law. It may be a positive assertion of facts or inferred from conduct but does not include “silence” (non – disclosure of a material fact), even where the wrong impression of the recipient of such misrepresentation may be removed by disclosure of such material fact (KL coming out clear that it dealt only with genetically – modified mangoes; BML clearing the air as regards its dealings with naturally – produced mangoes only).

Silence, however may be actionable in misrepresentation where: It distorts a positive representation (half – truth); the Contract requires Utmost Good Faith (uberrima fides); a fiduciary (business) relationship exists between the contracting parties.

Misrepresentation may be categorized into: –

Fraudulent Misrepresentation.

Negligent Misrepresentation.

Innocent Misrepresentation.

Fraudulent Misrepresentation:

If, for instance, KL represented to BML that it (KL) dealt with and would supply naturally – produced mangoes and instead supplied the genetically – modified mangoes, it would be liable to BML under fraudulent misrepresentation. The same position would hold true if BML misrepresented to KL that it (BML) dealt with and would purchase any mangoes without regard to the technique of production.

Negligent Misrepresentation:

Whereas fraud connotes “dishonest intention reflected in act or omission”, negligent misrepresentation falls more broadly under innocent misrepresentation owing to the fact that negligent misrepresentation involves the expression of belief upon grounds insufficient to convince a “reasonable man”, the test of reasonableness objectively connected to prudence.

Innocent Misrepresentation:

It simply refers to misrepresentation made without fault, for instance, KL misrepresenting that it deals with and will supply naturally – produced mangoes whilst unaware that its supplier supplies genetically – modified ones.

The common remedies for misrepresentation lie in rescission and damages.

The recipient of the (mis)representation, that is, the representee, has the right to rescind (set aside; avoid) the Contract on discovery of the misrepresentation. It is noteworthy that the Contract remains valid until such time as the representee rescinds it. The representee may also opt to affirm the Contract notwithstanding the misrepresentation, which affirmation may be express (declaration) or implied (inferred from conduct).

Thus, BML has the right to rescind the Contract and shall not be liable to KL for any loss incurred by KL if KL was the (mis)representor. The reverse position holds true as well.

Damages go hand in hand with rescission in that the party rescinding the Contract is also entitled to any damages arising from the misrepresentation, with the degree of causation and remoteness duly taken into account.

Thus, if KL was the misrepresenting party, BML is entitled to recover damages for the purchase price of the mangoes brought, up to the position it (BML) would have reasonably been in were it not for the misrepresentation.

Similarly, KL would be entitled to recover damages for the goods supplied to BML.

Extraneous factors such as interest, exchange rate, taxes and inflationary trends would only be considered up to the point where the cause of action accrues, that is, the representee discovers the misrepresentation.

Non – disclosure:

Other than the aforementioned circumstances where silence may be actionable in misrepresentation, there exists no general duty to disclose information that would be likely to affect the other party’s decision to conclude the Contract.

Where, from the essence of the subject matter of the Contract, only one party possesses full knowledge of the fundamental material facts, he is obligated to show “uberrima fides” and make full disclosure of such facts as known to him, failure to which the other party may, upon discovery, opt to rescind the Contract and sue for damages.

If, to the exclusion of BML, KL knew it (KL) dealt with genetically – modified mangoes only, BML is entitled to rescind the Contract and sue for damages.

BML’s exclusive knowledge of its (BML’s) dealings with naturally – produced mangoes only would also be actionable by KL.

BREACH:

The non – performance by any party to a Contract of its obligations under the Contract amounts to Breach of the Contract. Breach is actionable per se at the instance of the party so aggrieved, with remedies lying in damages, specific performance and restitution.

Damages, whilst referring to the monetary element of compensation for loss and damage, are subject to an objective analysis under causation/remoteness, measure and mitigation.

Causation/remoteness of damage concerns itself with the nexus (connection) between the breach and the damage, the latter having to be a direct consequence of the former for it (damage) to be considered. A chain of events each directly leading up to and being a direct consequence of and inextricably intertwined with the next (such that each cannot be viewed independently by a reasonable man) up to the point of damage, is also considered. The degree of “remoteness” (whether the damage is too remote from the breach) is usually left to the determination of the Judicial Authority, but any independent intervening act (novus actus interveniens) serves to disrupt the chain of causation and the eventual damage shall be considered from the point of “intervention” and will usually be attributed to and liability incurred by the author of such intervention.

Measure concerns itself with the monetary compensation for the damage as based solely upon the obligations of the party in breach and consequent loss to the aggrieved party. The concept of “measure” seeks to restore the aggrieved party to the position he would have been in had that particular damage not been occasioned to him.

Contribution to the damage proportionately reduces the damages recoverable to the extent of such contribution determined as a percentage of the overall liability factor.

Thus, if the Contract between KL & BML was for the supply of naturally – produced mangoes, KL would be in breach thereof by supplying genetically – modified mangoes. BML would be entitled to rescind the Contract and sue for damages (for loss incurred due to inability to trade in the genetically – modified mangoes) or specific performance (that KL supplies naturally – produced mangoes).

However, if the spirit and intention of the Contract was unclear as to the type of mangoes to be supplied, KL having fulfilled its obligation to supply the mangoes, and BML’s discovery of poor sales being only an antecedent element, BML would be liable to KL in breach.

KL would, as far as reasonable, be entitled to specific performance (BML to take up KL’s supply of genetically – modified mangoes up to the period determined/intended by the Contract) or damages if more favorable.

Mitigation imposes upon the aggrieved party the obligation to take all reasonable steps to mitigate the loss caused by the breach, and in effect, limits his claim for compensation to any damage incurred beyond his (reasonably) diligent efforts to minimize such damage.

Thus, if BML failed to inform KL of the anomaly regarding genetically – modified mangoes vis – a – vis naturally – produced mangoes supplied, damages recoverable from KL would be greatly reduced. A similar situation would occur where KL, after being informed of such anomaly, failed to rectify it.

Specific performance concerns itself with the directive, by a Judicial Authority, to a contracting party to “specifically perform” its obligations under the Contract, that is, do exactly that which it is obligated to do under the Contract.

It is noteworthy that this remedy revolves around the principle of mutuality, that is, it must be clear at the time of contracting that this remedy would be available to either party in the event of breach.

The directive may take the form of an injunction, either prohibitory (refrain from what the party had contracted not to do) or mandatory (compel the party to take positive steps to undo what he has done in breach of the Contract).

Thus, BML would, for instance, be compelled to honor its obligations under the Contract and take up the consignments reflected thereon. Similarly, KL would, for instance, be compelled to supply naturally – produced mangoes. The spirit and intention of the Contract would, however, be the determining factor for such compulsion.

This remedy, is however, resorted to where damages would be inadequate. In effect therefore, specific performance will not be decreed where a common law remedy (damages) would be adequate to put the aggrieved party in the position in which he would have been but for the breach. This position has been upheld even in our local jurisprudence, as captured in the case of MANZ00R – vs. – BARAM (2003) 2 EA 580.

Restitution is basically the point of synergy between damages and specific performance, and concerns itself with “restoration” of the aggrieved party to the position he would have been in were it not for the breach.

It, however deals more with the “monetary” aspect of compensation, and involves reimbursement of any consideration.

Thus, KL would, for instance, be compelled to reimburse BML the purchase price of the mangoes, while BML would be entitled to return the mangoes, both acts being subject to the quantity left unsold.

PART B:

As the re-sale value by BML does not constitute an element of the contract between it and KL, a re-negotiation of the Contract on 15th April, 2010 to include a different price (purchase price between BML and KL) though resulting in a new contractual agreement does not alter the subject matter of the Contract, (offer & acceptance to trade in mangoes) neither does it amplify the spirit and intention thereof.

However, two scenarios come into play as a result thereof, to wit, either: –

BML is now aware (by this date) that the mangoes supplied by KL are genetically – modified, in which case the vitiating elements (mistake, misrepresentation, non – disclosure) cannot be pleaded later in an attempt to rescind the Contract. Any non – performance of its obligation by any party shall now be strictly construed under constructive breach, with the remedies for breach (aforementioned) readily available to whichever party is aggrieved, as far as is reasonably prudent; OR

BML is still not aware (by the time of re – negotiation on 15th April, 2010) that the mangoes supplied by KL are genetically – modified, in which case the vitiating factors aforementioned may still be pleaded. Rescission and action for damages in breach are available for BML, the spirit and intention of the Contract being the determinant factors. Each party shall be liable to the varying extents discussed hereinabove.