Mistake

1
Mistake

• By James Prior

2
A contract which is well formed, but where one or
both parties made some fundamental false
assumption in forming it, is said to be made
under a mistake. There are four main categories
concerning mistake

• Common mistake- where parties are labouring under
  the same false assumption
• Mutual mistake- where the parties are at cross
  purposes
• Unilateral mistake- where only one party is
  mistaken and the other is aware of this
• Mistake over documents

3
Common mistake is where the parties are in
agreement, but make the same false assumption in
forming a contract, so their contract is based on
a situation which is false

• Two main groups have arisen this way
• Cases where the mistake is over the existence of
  the subject matte
• Cases where mistake is over the quality of the
  subject matter.

4
Where the subject matter is non-existent
The mistake is made over the existence of the
subject matter of the contract, the situation is
known as res extincta (the thing is destroiyed).
As the contract is over something which is not
avaialable, the mistake is so fundamental that
the contract is held void. Galloway v Galloway
(1914) Separation agreement made between husband
and wife, but found they had not been legally
married. Separation agreement was therefore held
void Couturier v Hastie (1856) Ship carrying corn
to the UK. While it was in transit a sale was
agreed. However corn had begun to perish and so
had already been sold unknown to the parties in
Tunis to prevent loss of cargo. Therefore the
subject matter did not exist that formed the
basis of the sale and the contract formed was
held void. Continued on next slide
5
This common law situation is now confirmed by
statute in the Sale of Good Act 1979 s6. Which
states, Where there is a contract for the sale
of specific goods, and the goods without the
knowledge of the seller have perished at the time
when the contract is made, the contact is
void. It may be, because of the wording of the
contract, that although the situation appears to
be one of res extincta, the courts decide that
one party has warranted the existence of the
subject matter. This arose in the case of McRae
v Commonwealth Disposals Commission
(1951) Plaintiff paid Ds for the right to
salvage an oil tanker which was said by Ds to be
lying off the Jourmand Reef. Plaintiff spent
money on equipment and expedition to salvage it,
but there was no tanker and the reef did not
exist. Held that Ds had warranted the existence
of the tanker in selling it to the plaintiff,
court ordered damages to be paid.
6
Mistake over title
Extension of res extincta is that of res sua
(literally, the thing is his own). Will rarely
arise, but in the case of Cooper v Phibbs (1867)
a lease was drawn up to transfer a fishery, and
unknown to both parties at the time, the buyer
was already the owner. It was held that the
contract was void for mistake, but that the party
who thought that he had been the owner should
have a lien on the property (a legal right over
it) until he had received a sum of money to
compensate for what he had spent on repair and
maintancence. This is a good example of the
courts using their equitable powers to bring
about a suitable remedy, when the common law
remedy would not be satisfactory.
7
Mistake over quality of subject matter
Where mistake of the parties merely results in a
bad bargain for one of them, the contract will
not be void- consistent with the law only
requiring sufficiency of consideration, not the
normal market value. This arose in Bell v Lever
Bros (1932) Lever Bros wanted to dispense with
services of Bell. They thought they were obliged
to give him a golden hand shake to persuade him
to leave and this came in the form of 30,000.
Then realised payment need not have been made due
to Bells prior behaviour. Lever Bros argued they
formed contract to pay golden handshake under a
fundamental mistake. HOL disagreed, saying
contract was to terminate employment, and that
was what had been achieved. It was only the cost
which would have been different. The contract was
therefore not impossible to perform, just a bad
bargain for Lever Bros. Continued on next slide
8
Lord Atkin said in such a case mistake will not
affect assent unless it is the mistake of both
parties Leaf v International Galleries
(1950) Painting sold, both buyer and seller
believed it to be a Constable. Proved later to
be a copy. Contract not held void for mistake as
painting was subject of contract and did exist.
Mistake merely over value or quality. Associated
Japanese Bank Ltd v Credit du Nord
(1988) Guarantee given over gaming machines. They
did not exist guarantee worthless and held void.
Not res extincta, as contract was over guarantee
which did exist, not over the gaming machines.
9
Mutual Mistake
In mutual mistake, the parties are not really in
agreement right form the outset, as they make
different assumptions in forming the contract. In
such cases if there is total ambiguity the
contract is held void, as in Raffles v Wichelhaus
(1864) where parties were at cross purposes as to
which ship had been the subject of the contract-
held to ambiguous to enforce. Where there is some
extra factor the contract may be allowed to
continue as in Wood v Scarth (1858) Contract
was upheld on buyers terms because of the extra
evidence of the statements of the clerk which had
misled the buyer.
10
Unilateral mistake
Unilateral mistake is where only one party ha s
contracted on the basis of a false assumption.
The other party will normally know of the
mistake, and in some cases will have encouraged
it, or even planned it. Mistake over quality of
subject matter The courts again take the view
that merely being mistaken over the quality or
value of the goods is not fundamental enough to
avoid the contract. This was raised in Smith v
Hughes where the court said that even if the
seller knew that the buyer was mistaken over the
quality of the oats which he bought, this would
not make the contract void. However, in Scriven v
Hindley (1913) the court held void a contract
where a buyer at an auction paid a very high
price for a fabric called tow, believing it to be
hemp, which was more valuable. Some mistakes may
be so fundamental and obvious that one party will
be taken to have known about the mistake of the
other as in Hartog v Colin and Shields (1939)
11

• Mistake as to identity
• This is an aspect of unilateral mistake.
  Generally occurred when one person has posed as
  someone else in order to persuade a seller to
  part with goods on credit. The cases fall into
  two groups
• Inter absentes
• Inter praesentes

12

• Inter absentes- where the parties are not in each
  others presence, but deal at arms length.
• Cundy v Lindsay (1878) - Cundy was found to have
  been fundamentally mistaken in dealing with a
  rogue posing as someone else- Blenkarn instead of
  Blenkiron who sold the goods on to an innocent
  third party namely Lindsay. The HOL held that the
  contract between Cundy and Blenkarn was void for
  mistake and therefore it was also held void
  between Blenkarn and Lindsay, obliging Lindsay to
  return the goods.

13

• Inter praesentes- where the parties meet face to
  face
• Phillips v Brooks
• Rogue posed as Sir George Bullough in order to
  obtain various valuable items of jewellery.
  Phillips presented with the cheque allowed him to
  take the ring. Cheque was dishonoured but by the
  time Phillips discovered this the jewellery had
  been sold for cash to Brooks, an innocent third
  party and the rogue had disappeared. Held that
  mistake was not crucial enough to avoid the
  contract since it was one of creditworthiness not
  identity. Seller was taken to have contracted
  with the person before him and Brooks was
  therefore able to keep the ring.
• Denning in comparing the case with Lewis v Avery
  preferred Brooks as where parties are inter
  praesentes they intend to deal with the person
  before them, and their contacts are therefore
  binding on that basis.

14
Mistake relating to documents

• Generally parties are bound by written documents
  per LEstrange v Graucob. Where are written
  contract is genuinely not in accordance with a
  parties intentions, the following may apply
• Non est factum this is not my deed
• Foster v Mackinnon An elderly man with poor
  eyesight was induced into signing a document,
  being told that it was a guarantee. When it was
  found to be a bill of exchange in favour of the
  plaintiff the court allowed the defendant plea
  of non est factum.
• Rectification amending a contract to reflect
  more accurately the parties previous oral
  agreement.
• Joscelyne v Nissen
• Father handed over business in return for
  daughter paying certain bills. Dispute arose when
  some bills not paid but no written agreement
  found relating to bills. However, it was
  rectified because of the evidence of regular
  payments having been made so far by the daughter.

15
The relationship between mistake and frustration

• Mistake occurs before or at the point of the
  contract, but frustration occurs during the
  lifetime of a contract
• Property Co Ltd v John Walker and Sons Ltd.
• Purchaser of building mistaken over value as
  building was listed and therefore subject to
  restrictions. Had the listing taken place
  before the contract the claim could may have
  succeeded in mistake, but in fact the listing
  occurred after the point of the contract.