By Law Teacher
5.2.1 Mistake Lecture – Introduction
Welcome to the fifth lesson of this module guide – 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 as if it never existed. This is different to when a contract becomes voidable, which will be explored within this chapter. There are three main categories of mistake which will be discussed; non-agreement, mutual agreement and unilateral mistake.
The chapter begins with an examination of non-agreement mistake, considering mistake as to subject matter, ownership and quality. The chapter then moves on to discuss mutual agreement mistake and the relevant test. Finally, unilateral mistake is considered as well as the surrounding case law.
Below are some goals and objectives for you to refer to after learning this section.
Goals for this section
- To understand what mistake is
- To understand the difference between ‘void’ and ‘voidable’
- To understand and be able to distinguish between the different types
Objectives for this section
- To understand the need for the doctrine of mistake
- To be able to distinguish between the three main types of mistake
- To understand the distinction between mistake and frustration
- To be able to apply and understand the case law surrounding mistake
5.2.2 Mistake Lecture
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:
- Non-Agreement mistake
- Mutual agreement mistake
- 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:
- The mistaken matter must be one which is fundamental to the parties’ decision to enter into the agreement
- 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.
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.
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 – Associated Japanese Bank (International) Ltd v Credit du Nord [1989] 1 WLR 255.
Exceptions – has one party taken responsibility for non-existence?
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.
The distinction between mistake and frustration
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 – Amalgamated Investment & Property Co Ltd v John Walker & Sons Ltd [1977] 1 WLR 164.
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.
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.
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.
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.
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’ – Bell v Lever Bros Ltd [1932] AC 161.
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.
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
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. See Raffles v Wichelhaus(1864) 2 Hurl & C 906 for an example.
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 – Smith v Hughes.
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 – Scriven Bros and Co. v Hindley and Co. [1913] 3 KB 564.
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:
- One party is mistaken as to a term of the contract, and would not have entered the contract but for this mistake
- The mistake is known or reasonably ought to be known to the other party
- 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.
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 – Hartog v Colin and Shields [1939] 3 All ER 566.
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.
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.
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.
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.
Face-to-face contracts
The current authority is Shogun Finance Ltd v Hudson [2003] UKHL 62. 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 decision in Shogun Finance v Hudson
The case was decided on a 3 to 2 majority to the effect that the innocent third party, Party D, was not protected. There were varying opinions of the judges as to the judicial reasoning behind this decision.
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.
5.2.3 Mistake Lecture – Hands on Example
The following section will provide you with a problem scenario which involves issues relating to the law of mistake. This will test your understanding and knowledge of what you have learnt and allow you put the law into practice. You should now understand the law of mistake, be able to identify the different categories of mistake, and the limitations to each. The problem scenario will cover a variety of issues, and the answers can be found at the bottom of the page.
In order to identify a problem question relating to mistake, you should look out for situations in which one or both of the parties are mistaken as to either some of the terms of the contract, the agreement, or the identity of the individual they are contracting with.
Here is a suggestion approach when tackling a problem scenario on the law of mistake which should allow you to answer the question fully and spot all the relevant issues:
- Have both parties made the same mistake?
- If so, is the mistake as to the terms of the contract or to the agreement?
- If the mistake is as to the terms, does the term fall under any of the pre-determined rules that are fundamental to a contract
- If the mistake is as to the agreement, consider the reasonableness of the interpretation and the fault doctrine
- If only one party has made the mistake, is it in relation to the terms or the identity of a party?
- Apply the corresponding tests for the above
Attempt to apply this approach to the problem scenario below; hopefully it should work for you. Remember, if you are struggling, just refer back to the detailed version in this chapter and refresh your knowledge.
Scenario
Steve is a car dealer who has recently entered into a number of contracts. He is concerned that some of the agreements he has entered into seem to be slightly different than what he was expecting. Focusing only on the principles from the law of mistake, analyse these contracts to see whether if there is anything Steve can do about these contracts.
The first contract Steve is concerned about was for a vintage 1970s Aston Martin. He had negotiated for the car and purchased it for a price of £10,000. Prior to this, he had bid on a ‘lucky dip’ auction online, where he would receive five mystery, pre-determined cars. After he had purchased the Aston Martin, he discovered that one of the five mystery cars was the exact Aston Martin he had negotiated for, he feels cheated because he has essentially paid twice for the same car.
- Would this purchase amount to a mistake of any kind?
The second contract Steve is questioning is a contract for the purchase of a world famous racing driver’s old race winning car. The price is particularly high due to the popularity of the race driver and it is considered a collector’s item. Unfortunately, a few weeks later, Steve discovers it is not actually one of the race driver’s old cars, meaning it is worth 10% of he paid. The seller had no idea of this fact either.
- What type of mistake has been made here, and is it actionable?
The third contract Steve entered into was with a fraud. The fraud wanted purchase a car and to pay on credit and Steve was concerned about his creditworthiness. The fraud claimed to be the son of a famous footballer, and Steve was happy with this after a quick check of his name and address, and let him take the car away. Subsequently, the fraud sold the car to a third party and has disappeared.
- What type of mistake has been made here, and does Steve have any remedy under the law of mistake?
Answer 1: The fact that Steve has purchased property that he already owns indicates it is a non-agreement mistake, under the Res Sua issue, mistake as to ownership. This is a form of non-agreement mistake, whereby a party purchases some property that they already have ownership of. Steve already had ownership of the car through his ‘lucky dip’ auction purchase, and then went on to negotiate for the car on its own. The case of Cooper v Phibbs is authority for the fact a purchase of property already owned would amount to a fundamental mistake as to the terms of a contract, and therefore the contract would be void for mistake.
There is a question of whether or not the seller of the car would have known Steve already owned the property or not, as for the Res Sua exception to apply, both parties must be unaware of the fact the property is already owned by the purchaser; but this is unlikely due to the nature of the auction with the cars being randomly chosen. If the seller was in fact aware that Steve already owned the car, the contract would not be void for mistake.
Answer 2: The type of mistake is a mistake as to the quality of the subject matter. A parallel can be drawn with the example from Lord Atkin in Bell v Lever Bros Ltd. His example was a painting which was painted by a famous painter, but unbeknown to both parties this was not true. This type of mistake will only amount to a mistake if it makes the contract ‘essentially different’ that it was before the discovery of the mistake.
As per Leaf v International Galleries, the discovery of the true owner of the car would not make the contract ‘essentially different’; Steve had contracted to purchase a racing car, and had purchased a racing car. Steve’s remedy should lie in breach of contract as long as one of the terms was as to the car being previously owned by the famous racing car driver.
Answer 3: This mistake was a unilateral mistake as to the identity of a party. The leading authority on face-to-face contracts is Shogun Finance Ltd v Hudson, which confirmed that there is a presumption that in a face-to-face contract, the identity of a party would not be fundamental to the contract, instead the mistaken party would be concerned with the creditworthiness of the buyer.
In Steve’s case, he was clearly concerned about the creditworthiness of the buyer, which he even expressed. Unfortunately, therefore, Steve would have no remedy in the law of mistake, as he mistaken to an attribute of the fraud (his creditworthiness), and not his actual identity.