Mistake

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Mistake

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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.

The effect of a mistake is:

At common law, when the mistake is operative the contract is usually void ab initio (from the beginning). Therefore, no property will pass under it and no obligations can arise under it.

Even if the contract is valid at common law, in equity the contract may be voidable on the ground of mistake. Property will pass and obligations will arise unless or until the contract is avoided. However, the right to rescission may be lost.

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Types of mistake

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Common mistake: where the both parties makes same mistake

Mutual mistake: where the parties are at cross purposes

Unilateral mistake: where only one party is mistaken

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Common mistake

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Common mistake exist where both parties to the contract make the same mistake. Three categories have emerged as giving rise to a cause of action

1) Res extincta

2) Res sua

3) Mistake as to quality

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Res extincta

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A contract will be void at contract law if the subject matter of the agreement is, in fact, non-existent (the subject matter of the contract no longer exists)

Res extincta will apply where both parties enter a contract with the belief that the subject matter exists when in fact it does not exist. The contract will be held to be void for mistake

- Scott v Coulson

At the time of entering a contract for life insurance both parties believed the person whose life was to be insured was living. When in fact he was dead.

The contract was void for mistake as it was a common mistake as to the existence of the subject matter (Res extincta)

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Res sua

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Where a person makes a contract to purchase that which, in fact belongs to him. The contract is void (where the goods already belong to the purchaser)

- Cooper v Phibbs

A nephew leased a fishery from his uncle. His uncle died. When the lease came up for renewal the nephew renewed the lease from his aunt. It later transpired that the uncle had given the nephew a life tenancy in his will.

The lease was held to be voidable for mistake as the nephew was already had a beneficial ownership right in the fishery.

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Mistake as to quality

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A mistake as to quality is only capable of rendering a contract void where the mistake is as to the existence of some quality which renders the subject matter of the contract essentially different to that what it was believed to be. (Only available in very narrow limits).

- Bell v Lever bros

Lever bros appointed Mr Bell and Mr Snelling (the two defendants) as Chairman and Vice Chairman to run a subsidiary company called Niger.

Under the contract of employment the appointments were to run 5 years. However, due to poor performance of the Niger company, Lever bros decided to merge Niger with another subsidiary and make the defendants redundant.

Lever bros drew up a contract providing for substantial payments to each if they agreed to terminate their employment. The defendants accepted the offer and received the payments.

However, it later transpired that the two defendants had committed serious breaches of duty which would have entitled Lever bros to end their employment without notice and without compensation. Lever bros brought an action based on mistake in that they entered the agreement thinking they were under a legal obligation to pay compensation.

The House of Lords held that this was only a mistake as to quality and did not render the contract essentially different from that which it was believed to be. The action therefore failed.

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Mutual mistake

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A mutual mistake is one where the parties are at cross purposes.

The courts apply an objective test to see if the contract can be saved.

Would a reasonable person looking at the correspondence between the parties have understood the contract to have a single meaning. If yes the contract is valid on that meaning.

If a reasonable person could not determine the meaning then the contract will be void for mistake.

- Raffles v Wichelhaus

The parties entered a contract for the sale of some cotton to be shipped by 'The Peerless' from Bombay. The Peerless had a sailing from Bombay in October and in December. The defendant thought that it was the October sailing and the claimant believed it was the December sailing which had been agreed.

The court applied an objective test and stated that a reasonable person would not have been able to state with certainty which sailing had been agreed. Therefore the contract was void as there was no consensus ad idem

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Unilateral mistake

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In unilateral mistakes only one of the parties is mistaken. There are two categories within unilateral mistakes:

1) Mistake as to the terms of the contract

- Hartog v Colin & Shields

The defendants mistakenly offered a large quantity of hare skins at a certain price per pound whereas they meant to offer them at that price per piece. This meant that the price was roughly one third of what it should have been. The claimant accepted the offer.The court held that the contract was void for mistake. Hare skins were generally sold per piece and given the price the claimant must have realised the mistake.

- Webster v Cecil

Court granted relief of a sale of a land

2) Mistake as to identity

Here one party makes a contract with a second party, believing him to be a third party (ie, someone else). The law makes a distinction between contracts where the parties are inter absentes and where the parties are inter praesentes.

Inter absentes: Where the parties are not physically present when the contract is made, eg where the contract is made through dealings through the post, telephone or over the internet, the courts will only make a finding of mistake if the claimant can demonstrate an identifiable person or business with whom they intended to deal with. A mistake as to their attributes will not suffice

- Cundy v Lindsey

A rogue, Blenkarn, hired a room at 37 Wood street, Cheapside. This was in the same street that a highly reputable firm called Blenkiron & Son traded. The rogue ordered a quantity of handkerchiefs from claimant disguising the signature to appear as Blenkiron. The goods were dispatched to Blenkiron & co 37, Wood street but payment failed. Blenkarn sold a quantity the handkerchiefs on to the defendant who purchased them in good faith and sold them on in the course of their trade. The claimants brought an action based in the tort of conversion to recover the value of the handkerchiefs. The success of the action depended upon the contract between the Blenkarn and the claimant being void for mistake. If the contract was void, title in the goods would not pass to the rogue so he would have no title to pass onto the defendants. Ownership of the goods would remain with the claimant.

Held: The contract was void for unilateral mistake as the claimant was able to demonstrate an identifiable existing business with whom they intended to contract with.

Inter praesentes: Where the parties contract in a face to face transaction the law raises a presumption that the parties intend to deal with the person in front of them:

- Phillips v Brooks

A rogue purchased some items from the claimant's jewellers shop claiming to be Sir George Bullogh. He paid by cheque and persuaded the jewellers to allow him to take a ring immediately as he claimed it was his wive's birthday the following day. He gave the address of Sir George Bullogh and the jewellers checked the name matched the address in a directory. The rogue then pawned the ring at the defendant pawn brokers in the name of Mr. Firth and received £350. He then disappeared without a trace. The claimant brought an action based on unilateral mistake as to identity.

Held: The contract was not void for mistake. Where the parties transact face to face the law presumes they intend to deal with the person in front of them not the person they claim to be. The jewellers were unable to demonstrate that they would only have sold the ring to Sir George Bullogh.

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Mistakes relating to signed documents - non est factum

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As a general rule, a person is bound by their signature to a document, whether or not they have read or understood the document

However, where a person has been induced to sign a contractual document by fraud or misrepresentation, the transaction will be voidable

Sometimes, the plea of non est factum, namely that 'it is not my deed' may be available. A successful plea makes a document void. The plea was originally used to protect illiterate persons who were tricked into putting their mark on documents. It eventually became available to literate persons who had signed a document believing it to be something totally different from what it actually was.

The use of the rule in modern times has been restricted.

For a successful plea of non est factum two factors have to be established:

(i) the signer was not careless in signing; and

(ii) there is a radical difference between the document which was signed and what the signer thought he was signing.

- Saunders v Anglia Building Society

An elderly widow wished to transfer the title of her house to her nephew by way of gift. Her nephew & the man named Lee prepared a document & asked her to sign. She signed it unread as she had lost her spectacles & trusted her nephew. Lee mortgaged the property to Building Society & disposed money for his own use. He defaulted on repayments & the Building Society accrued the possession of the house. Sounders made a declaration that assignment to Lee was void by reason of Non Est Factum.

The court held that the plea could not be raised due to 2 facts as mentioned above