Does The Law Of England And Wales Need A Doctrine Of Common Mistake?

Another category of common mistake is mistake as to quality.  The differences between the law and equity can also be seen under this category.  In law a mistake as to quality of subject matter will render the contract void.  However in equity such a mistake will render a contract voidable.  Bell v. Lever Bros. LTD [1932] is one of the leading cases on mistake as to quality.  The Lever Bros. had given two employees ‘golden handshakes’ of £30,000 and £20,000 in consideration of the early termination of their service contracts.  However due to the two employees breach of duties in trading for their own account the contracts of service could be voidable on terms of mistake.  They sort recovery of the sums paid to the employees.  However what was established by the House of Lords was that mistake was to the quality of the service contracts which generally is not sufficiently fundamental to render the contract void at common law. Therefore the contract was not rendered void.  Lord Atkin commented that a mistake as to quality, “will not affect assent unless it is a mistake of both parties.”  He further went on to highlight the need that the existence of some quality has to be essentially different from the thing as it was believed to be in order  to establish a breach.  In this case the courts provided a category of fundamental mistake which is essentially a very narrow doctrine in common law.

Lord Atkin's test of ‘Essential Difference’ was applied in Nicholson and Venn v Smith-Marriott (1947).  The plaintiff paid £787 for a set of linen napkins and tablecloths for what he believed to be “the authentic property of the monarch.”  In fact it was worth only £105.  The court ruled under S.13 of the Sale of Goods Act 1979 that there had been a breach of contract.  This was a sufficiently fundamental mistake as to make the contract void due to the essential difference between the actual product and what it was believed to be.

 

Traditionally there have been two categories of mistake, mistake dealt with by common law and mistake dealt with by the courts of equity.  As expressed by Lord Denning, previous courts willingness to extend the doctrine of common mistake beyond its proper limits has resulted in them holding contracts to be void which were only really voidable.  Equitable remedy on the other hand renders contracts voidable allowing liability to be set aside as to such terms the court thinks fit. Therefore the court can employ a role of preventing a party from insisting on his legal rights, if it would be unconscionable to allow him to do so.

 

Equitable remedy was seen in Solle v. Butcher  [1950].  Here the court sought remedy of common mistake in equity.  In this case a lease could not be void for common mistake at law because a mistake was as to quality and was not sufficiently fundamental.  Despite this, Denning showed that the lease could however be set aside in equity as it was voidable.  Denning stated when reaching his decision that equity has shown, “a progressive development” and that material representation of the other even though not fraudulent or fundamental will set aside contract.  His reasoning also incorporated common misapprehension by the parties about facts or relative and prospective rights as a enabling liability and equity to be set aside.

The facts of this case involved the claimant and the defendant who were partners in an estate agents business.  After the work had been completed both individuals believed that the standard rent of £140 charges in 1938 would not apply as the premises would be free from rent control.  The defendant in 1947 let one of the flats to one of the plaintiffs at a yearly rate of £250.  However later it was claimed by the plaintiff that the rent control legislation stating standard rent was only £140 applied to the premises.   As a result of this the plaintiff sort to recover the amount of rent that had been overpaid.  However the justification of common mistake was expressed by the defendant who claimed the lease should be rescinded.  The court was able to set aside the lease upon terms due to the flexible nature of equity. This decision signified a change in the direction and application of court rulings under the issue of common mistake.

The degree of flexibility an equitable remedy provides in common mistake can be seen in Grist v. Bailey [1967].  This case pays more attention to the price that is paid as indicating whether the mistake is sufficiently fundamental for it to be set aside. The plaintiff purchased freehold property from the defendant ‘subject to the existing tenancy thereof’ amounting to £850.  Both parties believed that a protected tenant occupied the property.  However it was later discovered by the defendant that the protected tenant died before the date of the contract.  She therefore sort to have the contract set aside.  The plaintiff claimed specific performance, as the property with vacant possession was worth £2250.  The court ruled that there was a common mistake as to the nature of the tenancy.  In common law this mistake was not such as to void the contract, but in equity it was fundamental since there was not in fact an ‘existing tenancy’.  This case reinforces Lord Steyn’s concerns about the protection of the reasonable man.  The contract will not be set aside in favour of a party who is at fault himself.  The intervening equity to set aside the contract protected the defendant enabling her to charge a true market value.  

The court in McGee v. Pennine Insurance Co. Ltd [1969] furthered the evolution of a doctrine of common mistake. The judicial approach was first from the stand point of common law and then secondly through the application of the broader equitable principles. It is this type of approach that a doctrine of common mistake should base itself on. The principles of common mistake in law are apparent, but the added advantage of being able to widen the traditionally narrow doctrine into equity will also benefit the innocent third party, as well as preventing the party without fault from being punished..

This idea was continued in Associated Japanese Bank (International) Ltd v Credit du Nord SA.  Steyn J commented on the, ‘narrow doctrine of common law mistake enunciated in Bell v Lever Bros. LTD’ supplemented by the more ‘flexible doctrine of mistake in equity.’  Here we see a suggestion of a mix between both common law and equity in providing an, ‘entirely sensible and satisfactory state of the law.’  Steyn further developed and clarified the relationship between common law and equity.  The approach to be taken would be first to consider whether the contract would be void for mistake at common law.  If this were to be the case then there would be no reason to consider any plea in equity.  However if the contract were valid in common law then there would be a need to use the equitable doctrine to mitigate the strict approach at common law.  

In the case Williams Sindall v. Cambridgeshire CC [1994] a line was drawn between a fundamental mistake and a serious and radical mistake. A fundamental mistake allowing the agreement to be void and have no effect in law whereas a serious and radical mistake having a wider application so as to permit the remedy of equity.  He went on to say common law is limited to mistakes with regard to the subject matter of the contract.  Equity on the other hand has regard to a wider and even unlimited category of  fundamental mistake.

The principle applied by the court was that it was necessary to determine whether the contract provides the bearer of the risks. In the case here the contracts’ true construction provided for the emergence of the very factual situation. The Court of Appeal refused to rescind the contract to purchase land for common mistake on the grounds that the conditions of sale allocated the risk of all known imcumberances affecting the lands of the purchaser.  This case also highlights the difficult relationship between common law mistake and mistake in equity through the categorisation and the scope of ‘fundamentalness.’

The case of Nutt v. Read (2000) also involved an application of the equitable jurisdiction.  The defendants who were to buy a chalet on a caravan park from the claimants agreed to pay a monthly rent to occupy the pitch (the tenancy agreement).  However the defendants  failed to pay this rent arguing on the that both parties mistakenly believed that the chalet could be sold separately from the site pitch on which it stood.  The judge held the agreement at first instance for the sale of the chalet to be void for fundamental mistake.  However what is important in this case is the judges decision to separate the two arrangements.  If this had been treated as a single agreement there would have not have been the possibility of rescinding in equity.  This is because the agreement would have been void in common law and the equitable jurisdiction would not have arisen.  This case highlights the advantage of the equitable jurisdiction in its ability to set aside terms and mitigate the rigid approach of common law, which either voids or validates the common mistake.

The case of Great Peace Shipping Ltd v. Tsavliris Salvage is an important development in the discussion of a doctrine of common mistake.  In September 1999 the vessel Cape Providence suffered damage causing danger of sinking with the loss of the crew.  The salvage services  offered by the defendant was unfortunately five days away.  A replacement was found in the name of Great Peace chartered for a minimum of five days.  Although the hirers advised the charters that they understood the vessel to be in close proximity it was discovered by the defendant that the Great Peace was some 400miles away.  An action was brought to recover the minimum five days hire charge by the chargers.  The defendant however refused to pay contending the charter was void at law for common mistake.  They also contended alternatively that is was violable for fundamental mistake in equity under the case of Solle v Butcher [1949]. However, it was not believed by Lord Toulson that there was a right to rescind in equity on grounds of common mistake, on the basis that there is a valid and enforceable contract under the principles of contract law. The ambiguous and rather vague description of ‘fundamental mistake’ also caused some concern with his Lordship, highlighting the overlapping nature of equity and mistake in law.

What was more important to the debate of the doctrine of common mistake was the concern about what the word ‘fundamental’ meant in relation to equity and the setting aside of a contract.  Therefore there is no right to rescind in equity on grounds of common mistake a contract which was valid and enforceable at law.  The judge was also not inclined to accept the broad discretion in equity.

Comparisons with other countries such as Australia show a call from some academics for the complete abolishment of common mistake in equity with all cases being dealt with on the basis of equitable mistake. Cases such as Taylor v Johnson in Australia have initiated a step in that direction. However, this suggestion would not be conducive in providing a settled and fair system for dealing with common mistake. Common law rules are designed to cope with the impact of unexpected and exceptional circumstances on apparent contracts. Cases that involve parties relying on mistake who have no reasonable ground for their belief are better dealt with through common mistake in law. The flexible nature of equity can be seen as being too vague and inconsistent and can not relate to the subject matter or other terms of the contract. However, to dismiss the advantages that equitable remedy presents would be wrong. Successive court rulings have begun to shape a flexible doctrine of common mistake. It has developed from the original narrow approach but has not gone so far into equity as to diminish the traditional intentions of common mistake in law. It is this approach therefore, that should provide for a doctrine of common mistake.

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BIBLIOGRAPHY

Casebook on Contract, Poole J, 4th Edition

Textbook on Contract Law, Poole J, 6th Edition

Westlaw

Lexis

Lawtel

, G.M Wilson

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