Mistake Lecture

The second of the vitiating factors of a contract we will be exploring is Mistake. A mistake may prevent the parties from reaching agreement. Even where they agree on the terms, a fundamental mistake shared by both parties may render their 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.

The Court of Appeal held in Great Peace Shipping Ltd v Tsavliris Salvage (International) Ltd [2003] QB 679 that equity has no separate power to set aside a contract for common mistake if it is valid at common law.

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

1. Common mistake
2. Mutual mistake
3. Unilateral mistake

Common mistake

A common mistake arises where the parties agree on the terms but share a mistaken assumption about an existing state of affairs. Under Great Peace, the following requirements must be met:

1. The assumption must concern the subject matter, a vital attribute of it, or circumstances necessary for performance. Its falsity must make the agreed performance impossible.
2. Neither party must have taken the risk that the assumption was wrong, and neither must have been responsible for the state of affairs that made performance impossible.

In Great Peace the ship was much further from the vessel in distress than both parties believed, but it could still arrive in time to provide the contracted service.

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?

We will now examine the circumstances in which a shared mistake may meet this test.

Res Extincta - Mistake as to the subject matter

The case of Strickland v Turner (1852) 7 Ex 208 concerned the purchase of an annuity that had already come to an end. 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

Under section 6 of the Sale of Goods Act 1979, a contract for the sale of specific goods is void if, without the seller’s knowledge, they had already perished when the contract was made.

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 can instead give rise to common mistake, 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 an Australian example of 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 or radically different without the fault of either party.

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, common mistake may be relevant. A later event may instead frustrate the contract, depending on its effect and who bears the risk. The case of Amalgamated Investment & Property Co Ltd v John Walker & Sons Ltd [1977] 1 WLR 164 illustrates the distinction. The building was listed after the sale contract was made. The resulting fall in value did not frustrate the sale. 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, the parties agreed on a lease of a fishery, unaware that the proposed tenant already had a life interest in it. The House of Lords set the agreement aside on terms.

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?

A shared mistake about quality will rarely make the agreed performance impossible. The cases below explain when a difference in quality is fundamental enough.

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 implies a term of satisfactory quality where the seller sells in the course of a business, subject to statutory exceptions. In a trader-to-consumer supply the corresponding term is in section 9 of the Consumer Rights Act 2015. Examples of possible defects are:

• 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

Lever Bros agreed to pay Bell and Snelling £30,000 and £20,000 respectively to end their service agreements. The company later discovered that the men had traded in cocoa on their own account in breach of duty and could have been dismissed without those payments. Lever Bros attempted to claim that the agreements were void for mistake of fact.

The House of Lords held the contract was not void for mistake. The company had obtained the termination of the service agreements for which it had bargained.

Examples in which a question of quality or description might arise are:

• 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 the applicable statute. Supplying another variety in breach of the agreed description would ordinarily be a breach of contract (section 13 of the 1979 Act or section 11 of the 2015 Act). 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 buyer received the particular painting both parties had identified.

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. The distinction between the identity of the painting and its attribution was applied 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. The attribution to Constable was treated as a contractual term. On the separate question of mistake, Denning LJ said:

‘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’

The mistake did not make the sale void. By the time the buyer sought to return the painting, five years after the sale, it was too late to reject it for breach of condition.

Applying the ‘essential difference’ rule

Associated Japanese Bank v Credit du Nord SA [1989] 1 WLR 255 illustrates how the rule applies to a guarantee. 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 machines never existed. When the lessee defaulted, the first bank claimed the unpaid rentals from the guarantor.

Steyn J held that the guarantee was conditional on the machines existing. He also held that, even without that condition, the guarantee would have been void for common mistake. Guaranteeing a lease of non-existent machines was essentially different from guaranteeing the lease the banks had in mind.

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 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 meant the ship that sailed in October and the other meant the ship that sailed in December. Nothing in their agreement resolved which ship was meant, so the buyer had a defence to the claim for refusing the December ship’s cotton.

The case of Smith v Hughes (1871) LR 6 QB 597 provides a contrasting set of facts. The seller showed the buyer a sample of oats. The buyer later complained that the oats were new, and said he had agreed to buy old oats.

The court ordered a new trial. If the buyer merely assumed that the oats in the sample were old, the seller’s knowledge of that assumption would not by itself prevent a contract.

Test for mutual agreement mistake

The courts apply an objective test. What would a reasonable person in the other party’s position have understood from the words and conduct used?

The leading authority for this test is Smith v Hughes, which was examined above. If a reasonable seller would understand the buyer to be agreeing to buy the oats shown, the buyer’s private intention to buy only old oats would not, by itself, prevent agreement.

The doctrine of fault in mutual agreement mistake

A party who causes a misunderstanding may be unable to rely on the apparent agreement. The question is still what the words and conduct conveyed in the circumstances.

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. Lots of hemp and tow carried the same shipping mark, contrary to the usual practice. Having inspected a sample of hemp, the bidder bid for tow in the belief that it too was hemp.

The auctioneer offered tow and the bidder meant to buy hemp. The misleading catalogue and shared shipping mark explained the mistake. The seller could not hold the bidder to the apparent bargain.

In Smith v Hughes, it mattered whether the seller knew the buyer thought the seller was promising old oats. That is different from knowing that the buyer had formed a mistaken opinion of the sample.

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

When one party claims that the other accepted an offer containing a mistake, consider the following:

1. Did the mistake concern a term of the proposed bargain?
2. Did the party accepting the offer know that it did not express the other party’s intention?
3. What do the negotiations, trade practice or other circumstances show about that knowledge?

A mistake about a term, such as the price or quantity offered, is different from a private mistake about whether the bargain will be profitable.

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. The printer normally cost over S$3,000. A pricing error reduced it to S$66 on three websites. The buyers placed orders for large numbers of printers and sued when the seller refused to supply them.

The Singapore Court of Appeal upheld the finding that the buyers actually knew of the pricing mistake. The purported contracts were void.

In England, Longley v PPB Entertainment Ltd [2022] EWHC 977 (QB) considered the distinction between actual knowledge and what a reasonable person ought to have known.

The judge concluded that actual knowledge was required. What a reasonable person would have realised can help the court decide what the party actually knew.

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 the sellers quoted a price per pound for hare skins after negotiating a price per skin. The buyer realised the error and could not hold them to the mistaken offer.

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, if Party C bought in good faith and without notice before Party A rescinded (section 23 of the Sale of Goods Act 1979), 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.

If the mistake as to identity prevents a contract arising between A and B, 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 considered that fraud about identity in a face-to-face sale made the contract voidable. This protected the innocent third party who had bought the car before the seller avoided the sale. The other judges agreed on the outcome.

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

The cases discussed in Lewis v Averay distinguish 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

Where the parties deal in writing, the court construes the documents to identify the intended contracting parties. If the seller intended to deal only with a named existing person whom the rogue impersonated, no contract is made with the rogue. Cundy v Lindsay (1878) 3 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, three women were selling a car. A fraudulent party claimed they were someone named ‘Hutchinson’. The sellers would not accept a cheque at first. After one of them checked the name and address in the telephone directory, they accepted it. The cheque was dishonoured and the majority held that title had not passed to the rogue.

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 sellers 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. In Shogun Finance v Hudson, Lord Phillips and Lord Walker each considered Ingram v Little wrongly decided.

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.

The majority held that no hire-purchase agreement was made with the rogue. The written agreement identified the real licence holder as the hirer, and he had never authorised the signature.

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, construed the written agreement as identifying the real licence holder alone. The rogue was therefore not a debtor under a hire-purchase agreement who could pass title to a private purchaser under section 27 of the Hire-Purchase Act 1964.

Lord Walker and Lord Phillips also treated the written agreement as decisive. They distinguished an ordinary face-to-face sale, where the seller is generally taken to intend to deal with the person present.

Lord Nicholls and Millett, who were the dissenting judges, supported the view of Lord Denning, that the third party should be protected. Lord Millett put it this way:

“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 finance company intended to deal only with the person identified in the written agreement. Neither his forged signature nor the delivery of the car made the rogue a party to it.

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 signatory who establishes non est factum can show that the document was void from the outset. 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 signatory meant to transfer her interest in the house to help her nephew raise money. The deed transferred it to another man, but it was not fundamentally different in character from what she intended. Her plea failed.

Where the mistake is in recording an agreement, the court may instead rectify the document. It must be shown that the document fails to give effect to an earlier binding contract or that, when it was signed, it failed to record an actual common intention which the parties had communicated to each other (FSHC Group Holdings Ltd v GLAS Trust Corporation Ltd [2019] EWCA Civ 1361).

Cite This Module

To export a reference to this article please select a referencing style below:

• APA
• MLA
• MLA-7
• Harvard
• Vancouver
• Wikipedia
• OSCOLA