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Law of Mistake in Contract Law

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18/05/20 Law Reference this

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The rigid approach to finding a common mistake undermines the purpose of the law of mistake. Both parties are at fault, however one party will use this claim in defence. When finding a common mistake, it cancels the purpose of finding a mistake overall. This approach can be seen in the following prevalent cases I will be discussing in this paper.

The Great Peace decision on the doctrine of equitable rescission for genuine mistake as proposed in the case, Solle v. Butcher. The approach provided a legal method that remained effective. The case consisted of a common or mutual mistake as to the decision in The Great Peace. The leading judgment in, Bell v Lever Brothers Limited,[1] where the Lever Brothers had entered into contract to end their term of employment with compensation. However, the defendants had breached their contracts of employment, where they were not aware of this. As a result, the contract was considered a common mistake for both parties and The house of Lords held that the agreements were not void for mistake[2].

How did the law change in Lever Bros Ltd?

The Lever Brothers argued that there was a breach of duty that was implied in their employment contract. The court held that the contract was not void and the mistake was not vital to the contract. Therefore, only a mistake of the subject matter of the contract or the quality of an item would void a contract completely. The mistake must be essential to the identity of the contract. The court identified the mistake as a common mistake.

Why did the law change in Solle v. Butcher?

Solle, the plaintiff was a tenant of the defendant Butcher. Before having deciding the rent, they both assumed the house did not come with any previous legislation that specified that if the landlord wants to charge over, he must give notice. Solle, wanted to be compensated for the money he had paid. The Plaintiff wants to be compensated for the money he has paid. The doctrine of mistake is prevalent where the contract can be void? Under the common law, a contract is void depending on the failure of a specific condition. (5) A common mistake is where both parties hold the same mistaken belief of the facts[i]. The case, Bell v Lever Brothers Ltd, established that a common mistake can void a contract if the mistake of the subject matter was crucial to contract. 

There are three different types of mistakes in contract law: unilateral mistake, the mutual mistake and the common mistake. A unilateral mistake is where one party is mistaken as to the terms or subject matter in the contract. There are exceptions where a contract is void from unilateral mistakes. For instance, one party relied on a statement of the other party about a fact that the second party should have known about[ii]. However, a party cannot be held liable by being given false information, received in good faith with believing it was true , Roswell State Bank v. Lawrence Walker Cotton Co[3].

There are two types of common mistake which can make a contract void.  matter at the time of the contract no longer exists. In the case, The Great Peace Shipping Ltd v Tsavliris international Ltd (2001), the owners of the ship wanted the defendants to recover the ship. The defendants were told that the ship was in proximity to the sinking ship[iii]. However, the Great Peace was not and the company refused to pay, on the grounds that the contract was void for a common mistake[iv].

The second type of mistake is common mistake where the subject matter of the contract belongs to the buyer[v].  An example of common mistake can be seen in the case of, Cooper v Phibbs (1867), where the plaintiff leased a fishery from the defendant. The fishery turned out to be owned already by the plaintiff.  The house of Lords held that the contract was void for common mistake[vi].

The court held that the common assumption between both parties must render the performance of the contract impossible[vii].  This case expanded on previous judgments in Associated Japanese Bank (International) ltd v Credit du Nord SA.(11) The judge realized that the test for determining a common mistake, one must assess the nature of the shared assumption to the contract.

A common mistake undermines the purpose of the law of mistake whereas mistakes at law may affect the truth of the formation of the contract.  An operative mistake, may render a contract void, whether or not there is an operative mistake should be based on whether the mistake is fundamental to the contract. In order for a mistake to affect the validity of a contract it must be an operative mistake. For a mistake to affect the validity of a contract it must be an “operative mistake”, ie, a mistake which operates to make the contract void.

A mutual mistake occurs when the contracting parties are at cross-purposes but believes that the other party is in agreement. However, they do not realize that there is a misunderstanding as to the terms of the contract or the subject matter. 

A mistake as to the quality of the subject matter will not render a contract void at common law.  In the case, Leaf v International Galleries, both parties believed that the painting was done by a constable. The court held that the contract was still valid[viii]. The mistake of continuing the contract, where the obligations under the contract are impossible, the contracted will deemed void[ix].   The case, Sheik Bros Ltd v Ochsner, the land was not able to grow crops contracted for so the contract was held void[x].

A unilateral mistake is where only one party is mistaken and the other party knows about it to take advantage of the error. A unilateral mistake as to the terms of the contract for a unilateral mistake to be operative it must correlate to the terms. To be able to set aside a contract on the grounds of a common mistake the mistake must be fundamental.

What do the developments in the law of frustration have to tell us about the law of common mistake? The theory of implied term is different when realizing a common mistake. It becomes frustrated when the claimant cannot establish that the document has failed to give effect to the intention of both parties[xi]. The courts have viewed that a common mistake is fundamental to void a contract[xii]. As well as, the courts have held that a mistake as to quality makes a contract void as can seen from Leaf v International Galleries, where the court of appeal stated that a contract for the sale of a picture would not be on the grounds of mistake if both parties entered into the contract believing the picture to be constable[xiii].

The contract may be void if there is a mistake as to the quality if the quality of the goods was fundamental to the contract. A unilateral mistake occurs where only one party is mistaken as to the terms or subject matter of the contract[xiv].    The case, Hartog v Colin & Shields, the complainant argued that he suffered a loss of profit and claimed damages when the defendant did not respect the contract. The defendant argued that Hartog would have known that this was a mistake[xv].

To conclude, the current law fails to strike an effective balance between the protection of the innocent party. The law should follow the intention of the contracting parties. If there is an implied term that is assumed to be not valid, the contract will even be void and if there is no implied term, then the contract can continue.  The law fails to effectively balance between the protection of the innocent party and the doctrine of finding a common mistake is biased and therefore, it is difficult to find and faults in the contract.

Bibliography

  • McKendrick E, Contract Law: Text, Cases and Materials (8th ednOxford University press 2018).
  • Fafinski S and Finch E, Contract Law: Text, Cases and Materials (2nd edn2010).
  • McKendrick E, Contract Law (12th edn, Palgrave Law Masters 2017).
  • Solle v Butcher [1950] 1 KB 671
  • Great Peace Shipping Ltd v Tsavliris (International) Ltd. Great Peace Shipping Ltd v
  • Tsavliris (International) Ltd [2002] EWCA Civ 1407
  • Bell v Lever Brothers Limited ([1932] AC 161)
  • Roswell State Bank v. Lawrence Walker Cotton Co., 56 N.M. 107, 240 P.2d 143 ( 1952)
  • Couturier v Hastie [1856] UKHL J3
  • Leaf v International Galleries [1950] 2 KB 86
  • \
    th Disposals Commission [1951]  are false.ng about hwta wa included in the email is s affect the valiidyt of the formation of Associated Japanese Bank v Credit Du Nord SA [1989] 1 WLR 255
  • Raffles v Wichelhaus [1864] EWHC Exch J19
  • Sheikh Brothers Ltd. v . Ochsner [1957] AC 13
  • McRae v Commonwealth Disposals Commission (1951) 84 CLR 377
  • Scott v Coulson [1903] 2 Ch 439.
  • Hartog v Colin & Shields [1939] 3 All ER 566.
  • Scott v Coulson [1903] 2 Ch 439.
  • All Answers ltd, ‘Great Peace Shipping v Tsavliris 2003 QB 679’ (Lawteacher.net, August 2019)
  • All Answers ltd, ‘Leaf v International Galleries – 1950’ (Lawteacher.net, August 2019)
  • All Answers ltd, ‘Mistake Lecture’ (Lawteacher.net, August 2019)

[1] Bell v Lever Brothers Limited ([1932] AC 161)

[2]

[3]  Roswell State Bank v. Lawrence Walker Cotton Co., 56 N.M. 107, 240 P.2d 143 ( 1952 )


[i] Wikipedia: Definition from: English Contract Law and Mistake Contract Law 

[ii] ibid

[iii]Law Teacher: Great Shipping Ltd v Tsaviliris Salvage International Ltd [2003] QB 679

[iv] ibid

[v] Wikipedia: Definition from: English Contract Law and Mistake Contract Law 

[vi] ibid

[vii] Contract Law, 1997.

[viii] Law Teacher: Leaf v International Galleries-1950

[ix] ibid

[x] ibid

[xi] Law Teacher: 5.2.2 ‘Mistake Lecture’

[xii] Contract Law, 1997

[xiii] Law Teacher: Leaf v International Galleries -1950

[xiv] Law Teacher:‘Mistake Lecture’

[xv] Law Teacher: ‘Hartog v Colin and Chnields – Summary

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