Mistake Lecture

The second of the vitiating factors of a contract we will be exploring is Mistake. The law of mistake refers to where both parties have entered a contract under the same fundamental mistake, which will render the contract void.

The significance of the contract being void will be analysed in detail later in this chapter, but the essential characteristic of a void contract is that there is no choice of the parties whether or not to void the contract, under the law it will automatically be so. This differs from the ‘voidable’ position under misrepresentation.

Mistake is a remedy which can arise either through the common law or equity, however, the decision in Great Peace Shipping Ltd v Tsavliris Salvage International) Ltd [2003] QB 679 has limited mistake mostly to the common law.

There are three broad categories of mistake which this chapter will explore:

  1. Non-Agreement mistake
  2. Mutual agreement mistake
  3. Unilateral mistake

Non-Agreement mistake

A non-agreement mistake refers to where the parties have reached a valid agreement, but would like nullify this agreement due to a mistake as to the terms or subject of the agreement. This is often referred to as a ‘common’ mistake, as a claim for non-agreement mistake requires that both parties made the same mistake. The two main requisites for non-agreement mistake are as follows:

  1. The mistaken matter must be one which is fundamental to the parties’ decision to enter into the agreement
  2. The party wishing to rely on common mistake must have reasonable grounds for their belief

This type of mistake will operate where one of the parties wishes to negate the agreement for mistake, but the other party denies this mistake.

Exam consideration: In the event of a mistake in which both parties are mistaken, why do you think one party may deny there is a mistake?

For the purpose of requirement ‘a’ the courts have pre-determined a number of categories which will be presumed to be fundamental to the parties’ decision to enter the contract. We will now examine each of these in turn.

Res Extincta - Mistake as to the subject matter

The case of Strickland v Turner(1852) 7 Ex 208 confirmed that a mistake as to the subject matter would amount to one which is fundamental to the decision to enter the agreement. In this case, there was a contract for the annuity of a person’s life, but there was a (rather large!) mistake, in that the person was already dead.

Perishing of specific goods

The perishing of specific goods will amount to a fundamental mistake, as per Section 6 of the Sale of Goods Act 1979.

Non-existent goods

Section 6 of the Sale of Goods Act 1979 requires that the goods have perished, therefore, they will have needed to exist at some point. Goods which have never existed at all will also amount to a fundamental breach, as in Associated Japanese Bank (International) Ltd v Credit du Nord [1989] 1 WLR 255.

Exceptions - has one party taken responsibility for non-existence?

You should be careful when automatically jumping to the conclusion that because the subject matter of the contract does not exist, that this will amount to a valid claim for mistake. If there is a term in the contract which allocates the risk to one party in the event of non-existence or non-delivery of the goods, any breach of this will amount to a breach of contract, meaning a claim for mistake would not be able to be made. McRae v Commonwealth Disposals Commission(1951) 84 CLR 377 is authority for this point.

The distinction between mistake and frustration

A further common error when assessing contracts for the doctrine of mistake is to identify the non-existence of a subject matter as a matter for frustration. The doctrine of frustration is covered in a later chapter, but essentially relates to where after the formation of the contract, the obligations under the contract become impossible to complete.

The key distinction is where the impossibility of the contract occurs. If the impossibility, unknown to the parties, is present before the creation of the contract, this will amount to mistake. Where the contract becomes impossible subsequent to the creation of it, this will amount to frustration. The case of Amalgamated Investment & Property Co Ltd v John Walker & Sons Ltd [1977] 1 WLR 164 is evidence of this. This distinction will become clearer once you cover the chapter on frustration.

Res Sua - Mistake as to ownership

This category of fundamental mistake refers to where two parties contract for the purchase of some kind of property, but unknown to both of these parties, the purchaser of the property already owns the property.

Cooper v Phibbs (1867) LR 2 HL 149 is an example of such a situation. In this case, there was an agreement to purchase a lease, but unknown the both parties, the purchasing party already had a life entitlement to the lease through other means. Therefore, the contract could have been set aside for mistake.

Mistake as to quality of the subject matter

Mistake as to the quality of a subject matter is a fairly straightforward concept; it refers to where both parties believe the subject matter is of a certain quality, or has a certain quality, whereas in reality it does not. An example would be a purchase for a famous footballer’s boots which have been signed them, if it was believed to be of this quality at the time of contracting, and then subsequently came to light that they were not actually the footballer’s boots, this would be a mistake as to the quality of the subject matter.

Is a mistake as to the quality sufficiently fundamental to a contract?

The law of mistake is concerned with the impossibility of a contract being completing, therefore, this suggests that mistake as to the quality of a subject matter would not be sufficiently fundamental to a contract, as it would not render the contract impossible. Despite this, case law has developed to allow the doctrine of mistake to operate in specific circumstances which will be covered later in this sub-section.

A claim for mistake or a breach of the satisfactory quality term?

The distinction between these two principles is very important. Section 14(2) of the Sale of Goods Act 1979 outlines that all goods sold should be of ‘satisfactory quality’. This refers to the tangible quality of the goods, some examples are as follows:

  • A brand new car which keeps breaking down
  • Some headphones in which only one side of the audio works
  • An expensive suit which is discoloured after the first wash.

A mistake as to quality refers to a mistake of ‘some quality which makes the thing essentially different from the thing it was believed to be’, as per Lord Atkin in Bell v Lever Bros Ltd [1932] AC 161.

Case in Focus: Bell v Lever Bros Ltd [1932] AC 161

In this case, the Lever Bros appointed the two defendants to positions of power in a subsidiary of his company. The company was extremely successful and made a lot of revenue. The two defendants then retired. As part of their retirement package, they received large bonuses of £30,000 and £20,000 each. It was subsequently discovered that the defendants had been involved in a cartel in order to steal information and make money. Lever Bros attempted to claim that the contract was void for mistake of fact.

The House of Lords held the contract was not void for mistake. The mistake was not sufficiently close to the subject matter of the contract (the retirement payments).

Examples of this would be:

  • A contract for a particular artist’s work, and it turns out not to be by that artist
  • A contract for 10kg of potassium, but it turns out to be a different substance

A comparison between the two would be a contract for an amount of ‘Granny Smith’ apples. If the apples were rotting and full of worms, this would be a breach of the ‘satisfactory quality’ term under Section 14(2), whereas if the goods were a different type of apples, this would be a claim for mistake as to the quality of the goods. It should be noted that just because there is a mistake as to the quality of the goods this does not mean that this will amount to a claim for mistake.

The test of ‘essential difference’

Lord Atkin in Bell v Lever Bros Ltd stated the goods must be essentially different in order to amount to a claim for mistake. Later in his judgment he clarified this approach and outlined its scope and limitations. It can be concluded that it has an extremely narrow scope.

Lord Atkin used this hypothetical scenario in order to highlight his point:

“A buys a picture from B: both A and B believe it to be a work of an old master, and a high price is paid. It turns out to be a modern copy. A has no remedy in the absence of representation or warranty”

Lord Atkin stated that it was not enough to merely state ‘If I had known the true facts I would not have entered into this contract’. His view was that this kind of issue could easily be prevented by the use of an express term in the contract. Taking the example of the purchase of a piece of art, if the artist is important, one of the terms of the contract should be ‘this contract is for the sale of a piece of art by …’. This would ensure a remedy.

The judicial reasoning for such an approach is unclear. Lord Atkin referred to his hypothetical scenario, explaining that between a contract for the painting actually painted by the old master, and the modern copy, there was no essential difference. The subject matter of the painting was still that of the old master’s.

Treitel, one of the most distinguished academics of contract law, disagrees with this approach, and suggested a new approach whereby if a particular quality is so important to the parties that they use it to describe the subject matter, it could amount to a mistake. Therefore, in Lord Atkin’s hypothetical scenario, as they describe the subject matter with reference to the old master, it could amount to a claim for mistake. Despite this being a seemingly logical approach, it was rejected in Leaf v International Galleries [1950] 2 KB 86.

In Leaf v International Galleries, a contract was formed for a painting believed to be created by the famous artist, Constable. There was no express term as to it being a Constable painting, therefore the courts confirmed the approach of Bell v Lever Bros Ltd, stating:

‘What he contracted to buy and what he bought was a specific chattel, namely, an oil painting of Salisbury Cathedral [and]… it remains true to say that the plaintiff still has the article which he contracted to buy’

Clearly, again, the courts needed an express term in the contract to result in a breach of contract for a remedy; mistake could not provide a remedy in this case.

The limited exception to the ‘essential difference’ rule

There is one extremely limited exception to the ‘essential difference’ rule, which will allow a claim for mistake to be as to the quality of the subject matter. This rule was created in Associated Japanese Bank v Credit Du Nord SA [1989] 1 WLR 255. The facts are key, and they are as follows:

Case in Focus:Associated Japanese Bank v Credit Du Nord SA [1989] 1 WLR 255

In Associated Japanese Bank the Bank (A) had an agreement with a party (B) to purchase four machines from him. Following the purchase, they would lease the machines back to him. The transaction required a guarantor, therefore a second bank (C) guaranteed the agreement for the first bank. The party selling the machines turned out to be a fraud, and once the bank had paid for the machines, he disappeared and they discovered the machines never existed. The bank then attempted to enforce their guarantee against the second bank for the £1,000,000 purchase price. The second bank attempted to rely on mistake as to the quality of the subject matter.

The courts decided that the subject matter of the contract was essentially different to what the second bank agreed to, and therefore the contract was void for mistake. The essential difference was that the contract was for the guarantee of existing machines, not machines which did not exist.

The application from Associated Japanese Bank v Credit Du Nord SA is extremely limited; therefore it is sensible to conclude that under most circumstances, mistake as to the quality of the subject matter will not result in an actionable claim for mistake.

Mutual agreement mistake

An agreement mistake is one in which a fundamental mistake has been made relating to the terms of the contract which prevent the formation of a legally binding contract. This is often referred to as an ‘offer and acceptance’ mistake. The parties will subjectively believe they have formed a legally binding contract, but in reality have not done so. This first examination of agreement mistake will concentrate on mutual agreement mistake, where both of the parties to the contract hold this belief.

An example of a mutual mistake can be found in Raffles v Wichelhaus(1864) 2 Hurl & C 906, where a contract was made for the purchase of some cotton which would be delivered by a ship named ‘Peerless’ which sailed from Bombay. However, there was two ships named ‘Peerless’ which sailed from Bombay, one in October and one in December. One party believed the contract was for the delivery in October, and the other party believed it was a contract for the delivery in December. Therefore, as per offer and acceptance rules, there was no mirror agreement due to this mistake. This was a reasonable mistake to make, therefore the contract was void for mistake.

The case of Smith v Highes(1870) LR 6 QB 597 provides a contrasting set of facts. In this case, a contract was formed for the purchase of some oats, which the purchaser had previously used a sample of. When the oats for the contract were delivered, the purchaser complained that they were new oats, rather than old oats, and he was mistaken as to this. The contract never stated that the oats were to be old or new.

This argument was rejected, as an agreement was formed via the sample of the oats. The purchaser agreed to purchase a lot of the oats he had been given a sample of, which he was, there was no question as to the agreement, and the purchaser was simply mistaken as to the sample of the oats being old when they were new.

Test for mutual agreement mistake

The courts will apply an objective test to the question of whether there is an agreement, considering whether one party’s interpretation was more reasonable than the others.

The leading authority for this test is Smith v Hughes, which was examined above. The most reasonable approach to the contract was the one of the defendants, who believed the agreement was formed based on the sample oats.

The doctrine of fault in mutual agreement mistake

The courts have identified a doctrine of fault in the law of mutual agreement mistake. Even where there can been a valid agreement, if one party is responsible for the mistake of the other party, the court will decide the case in favour of the aggrieved party.

This approach is highlighted in Scriven Bros and Co. v Hindley and Co. [1913] 3 KB 564. In this case, there was an auction for two lots of cargo from a ship. One was hemp, and one was tow. The auction description did not list that the two lots of cargo had different contents. Both lots of cargo were in the same packaging, and there were no distinguishing factors between the two (aside from the contents). A prospective buyer inspected one of the lots of cargo which contained hemp, and assumed that both lots contained hemp based on the identical packaging. He then purchased the other lot, which contained tow.

The issue here is that the parties had formed an objective agreement for that specific lot, and there was no mutual mistake. However, as the mistake was caused by the auctioneer’s actions of not distinguishing the two lots, the courts ignored this fact and the contract was void for mistake. The key fact is that the defendant had no duty to examine the different lots, but the auctioneer did.

The doctrine of fault is also evident in Smith v Hughes, it was the fault of the buyer that they did not expressly indicate that old oats were required. If the seller was aware of this, the case would have been decided differently. Therefore, the doctrine of fault can work for or against either party in the contract; it is not always the buyer or always the seller.

Unilateral mistake

This form of mistake applies when only one of the parties to the contract is mistaken as to part of the contract. Unilateral mistake is limited, but will usually operate in circumstances where one party is mistaken as to part of the contract, and the other party is aware of this fact and takes advantages of it.

Unilateral mistake as to the terms of the contract

The three requirements that will render a contract void for unilateral mistake in relation to the terms of a contract are:

  1. One party is mistaken as to a term of the contract, and would not have entered the contract but for this mistake
  2. The mistake is known or reasonably ought to be known to the other party
  3. The mistaken party is not at fault

Requirement one is fairly straightforward, the courts will consider whether, if the mistaken party had known the real truth as to their mistake, they still would have entered into the contract. If they would have, this cannot amount to an actionable claim for mistake.

Exam consideration: Is this requirement similar to the ‘inducement’ principle from the doctrine of misrepresentation?

Case in Focus: Chwee Kin Keong v Digilandmall.com Pte Ltd [2005] 1 SLR(R) 502

In this case, Digilandmall.com Pte Ltd were selling HP laser printers online. They owned two separate websites. On both of the sites the printer was priced at over $3000. A technical mistake was made by an employee and it was then priced at only $66 on both websites. Chwee Kin Keong discovered the mistake and purchased a large amount of these printers. The website refused to sell and Chwee Kin Keong commenced an action for damages.

It was held that the contract was void for mistake. This was because the defendant had constructive knowledge of the mistake. This was clear because they purchased a large amount, knowing a mistake as to the price had been made.

This means the party benefitting from the mistake cannot simply claim ignorance to a mistake, under many circumstances it should be obvious that a mistake has been made if the deal is too good to be true.

The third requirement is fairly straightforward and obvious and is given its literal meaning; if the mistake made is unreasonable they would be considered to be at fault.

This type of mistake seems fairly straightforward to prove on a cursory examination, but the requirements have proven fairly difficult to meet. In Hartog v Colin and Shields [1939] 3 All ER 566 a contract was formed for a certain type of hare skin. The seller had priced it at a price one-third the custom price. Similar to the previous case examined, the defendant had taken advantage of the mistake that they either were aware of, or should have been aware of.

Unilateral mistake as to identity

The most common form of unilateral mistake that is actually actionable is where there has been a mistake of identity. Take the following example:

Party A sells some goods to Party B. Party A is mistaken as to the identity of Party B, who is in actual fact a fraud. Party A transfers property of the goods to Party B before receiving anything in turn. Party B then sells the goods on to Party C, and Party B disappears.

To understand the significance of a claim for mistake as to identity, the result of a claim under fraudulent misrepresentation in this example should be examined. As you will know, the two remedies for misrepresentation are damages and rescission. In the case of damages, as Party B has disappeared, Party A will have nobody to direct the claim for damages to, and will have no chance of recovering anything. As for rescission, as Party B passed property to the goods to Party C, who were unaware of the misrepresentation, there will be a bar to rescission in the form of third party rights. As you can see, fraudulent misrepresentation is not an ideal claim to bring where the statement maker cannot be traced.

A claim for unilateral mistake as to identity provides a remedy in this situation. Due to the mistake, the contract is void at the time of creation, therefore, Party B would never have title in the goods, and therefore could never pass title to Party C. This means that Party A has one of two remedies; they may recover the goods from Party C, or sue Party C under the tort of conversion.

Unfortunately, there is a clear issue here, Party A and Party C are both innocent, yet one will be subject to an unequitable result. Lord Denning in Lewis v Averay [1972] 1 QB 198 suggested in the event of mistake as to identity, the contract should be void, not voidable. This would protect the third party, as Lord Denning suggested they are generally the most innocent party and the one in need of protection. This approach was rejected by the other judges and instead the courts outlined circumstances in which a mistake to identity would be actionable.

Lewis v Averay - What is a mistake as to identity?

The decision in Lewis v Averay made a distinction between ‘true mistakes as to identity’ and mistakes as to attributes. Mistake as to the attributes of a party is not sufficient for an actionable claim of mistake, for example, the creditworthiness of a party. The mistake must be as to the actual identity of the party.

An example of this can be found in King’s Norton Metal Co v Edridge Merrett & Co (1897) 14 TLR 98, where a fraudulent party pretended to be a business, but in reality the business they claimed to be did not exist. The contract was for the sale of goods, and the fraudulent party disappeared once he had received the goods. The aggrieved party claimed that the contract was void for mistake as to identity.

The court ruled that in this case, the innocent party was not concerned with the identity of the party, they only had an interest in the creditworthiness of the fraudulent party. In other words, the innocent party was mistaken as to an attribute (creditworthiness) of the fraudulent party, not their identity, meaning the claim failed.

Interestingly, in respect of mistake as to identity, the courts have differentiated between contract that are made face-to-face, and written contracts.

Mistake as to identity in written contracts

The courts will presume that when a contract is in written form the parties only intend to contract with the parties named in the contract. Therefore, if the contract turns out to be with anyone other than the individuals named in the contract, it will be void for mistake. Cundy v Lindsay(1877) App Cas 459 is authority to this effect.

Face-to-face contracts

The law on mistake as to identity is still confusing. The current authority is the House of Lord decision in Shogun Finance Ltd v Hudson [2003] UKHL 62, however, an examination of the prior law will help you understand this decision and analyse the judicial reasoning.

The case of Phillips v Brooks Ltd [1919] 2 KB 243 was authority that ruled the general presumption is that identity is not crucial to the decision to contract. In that case, a fraudulent party went into a jewellery shop, claiming to be ‘Sir George Bullough’, and wrote out a cheque in his name and gave his address. The seller checked the name and address, and was content that these matched and therefore allowed the fraudulent party to leave the shop without paying. The court held that this contract could not be void for mistake as to identity as the seller intended to contract with the person in the shop. The judgement of that person’s creditworthiness had persuaded the seller to allow the sale on credit terms, not his identity.

The recognised exception to this rule is where an innocent party intends to contract with a company, and the individual they contract with holds themselves out to be an agent of that company, but in reality has no authority to act - Hardman v Booth(1863) 1 H & C 803

The case of Ingram v Little [1961] 1 QB 31 was based upon similar facts to Phillips v Brooks Ltd, yet the judgment was different. In Ingram v Little, two sisters were selling a car. A fraudulent party claimed they were someone named ‘Hutchinson’. The sisters would not accept the cheque at first, but after checking his name, initials and address against his telephone number they accepted the cheque. When the fraudulent party did not pay the sisters, they claimed for mistake as to identity, which was allowed.

This decision does not seem reconcilable with Phillips v Brooks Ltd. In both circumstances it would appear the seller was only interested in the creditworthiness of the buyer. The checks as to the identity of the buyer were similar in that there were minimal efforts, which would suggest it was not the identity of the party they were interested in, only the creditworthiness.

It is suggested that the courts approach in Ingram v Little was an analysis of the offer and acceptance principles. The sisters presented an offer which was only acceptable by Hutchinson, therefore, as the fraudulent party was not Hutchinson, he could not accept the contract, making it void. There is still difficulty here as it is clear the fundamental issue was not his identity, it was his creditworthiness. It has been suggested that the courts were more lenient in Ingram v Little due to the sisters being elderly women, who were protected for policy reasons.

Overall, it is clear that the law on mistaken identity in face-to-face contracts was unclear. Unfortunately, Shogun Finance v Hudson has done little to help that!

The decision in Shogun Finance v Hudson

Case in Focus: Shogun Finance v Hudson [2003] UKHL 62

In Shogun, a fraud (A) visited a motor dealer (B) and expressed an interest in purchasing a particular car. During negotiations the fraud used a stolen driving license as proof of his identity, name and address. The dealer was happy with this and they both agreed on a price for the car. The finance company (C), Shogun Finance, were contacted and they agreed to finance the hire purchase of the car. The document signed for the finance agreement used the stolen driving license’s identity, but the fraud signed himself with a forged signature. The finance company carried out the required credit checks as to the identity of the stolen driving licence and approved the finance. The fraud then took the car and sold it on to an innocent third party (D), subsequently disappearing.

It was decided that the contract was void for mistake as to identity. Due to the forged contract, the finance company believed they were entering into a contract with the owner of the stolen driven license, whereas in reality it was with the fraud.

The case was decided on a 3 to 2 majority to the effect that the innocent third party, Party D, was not protected. There was varying opinions of the judges as to the judicial reasoning behind this decision:

Lord Hobhouse, of the majority, used a construction of the document Party C signed. Party C contracted with the real owner of the stolen identity, and as the document was signed with a forged signature, on construction of the rules of offer and acceptance, the contract was void for mistake as the finance company only intended to deal with the real owner of the stolen identity. This was of fundamental importance to the contract as they had run credit checks on the individual.

Lord Walker and Philips, also of the majority, followed Lord Hobhouse’s arguments with regards to the written contract being the key factor. They also used rules of offer and acceptance, similar to the approach in Ingram v Little. However, they also maintained the presumption that identity is not usually material in face-to-face contracts.

Lord Nicholls and Millett, who were the dissenting judges, supported the view of Lord Denning, that the third party should be protected. This quotation sums their argument up nicely:

“It is surely fairer that the party who was actually swindled and who had an opportunity to uncover the fraud should bear the loss rather than a party who entered the picture only after the swindle had been carried out”

The two judges argued there should be no distinction made between parties identified in written documents and parties identified face-to-face. They argued if the finance company was present in the room to check the details (making the contract face-to-face) the result of the circumstances would be no different. Therefore, the argued that fraud as to identity should render the contract voidable, which protects the innocent third party.

Analysis of the decision in Shogun Finance v Hudson

Essentially, the decision made was that the contract was between the finance company and the person named in the written document. As the signature was forged, this person had in fact not entered into the contract, someone else had (Party A), and therefore, the contract was void for mistake as to identity.

Therefore, the distinction between written contracts and face to face contracts in the context of mistake as to identity still remains. The fact the Shogun Finance v Hudson decision was made on an extremely close 3 to 2 majority suggests that it remains an uncertain area of law. Unfortunuately, for now, this decision of the House of Lord will remain binding and should be used as authority for the difference between face-to-face and written contracts, despite the questionable approach.

To summarise the arguments against the difference, there seems to be little logic in distinguishing between the two approaches. It seems in most situations the fact that the contract is made face-to-face or via written correspondence does not have an impact on the outcome of the contract.

Documents signed by mistake

A party may be released from a contract where they can prove that they have signed the document by mistake. This arises where they sign a contractual document which is fundamentally different to the contract they believe it to be.

Saunders v Anglia Building Society [1971] AC 1004 is authority for this form of mistake. It should be noted that the party signing the document must not be careless when signing the document. In Saunders v Anglia Building Society, the party did not read the document before signing it, this was held to amount to carelessness, meaning their claim for mistake was not valid.

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