Lord Phillips MR in Great Peace Shipping v Tsavliris Salvage (International) Ltd 2002 - Discuss.

The harshness of the position at common law is exemplified by the facts of Bell v Lever Bros itself.  In that case, it was found that an agreement to terminate a broken contract, in other words one that could have been terminated otherwise, was no different in kind to an agreement to terminate an unbroken contract.  While the subject-matter of the two agreements (the service contracts) may have differed in quality, that quality was not of sufficient importance to satisfy Lord Atkin’s test whereby the quality would have to make the agreement essentially different from the agreement it was believed by both parties to be.  Lord Atkin said: ‘The contract released is the identical contract in both cases, and the party paying for release gets exactly what he bargains for’.  Despite the harshness he realised he was imposing on the claimant, Lord Atkin highlighted the ‘paramount importance’ of observing contracts.  Indeed, he goes on to list several examples in which, although it is clearly unjust to allow the contract to remain, in that it places the risk of there having been a mistake on one of two innocent parties, there is no legal basis for rescinding the contract.  To quote one such example, he said that if A buys B’s horse, thinking the horse is sound and paying the price of a sound horse, A will be bound by the contract, so long B has made no representation as to the soundness of the horse.  So even though A would certainly not have bought the horse had he not mistakenly thought it was sound, he is still bound by his purchase and cannot recover the price on discovery that the horse is not in fact sound.

It was no doubt the desire to avoid such unfairness in the case of Solle v Butcher that the Court of Appeal applied an equitable remedy.  The tenant there was claiming recovery of the sums he had paid to the amount of £250 pa in rent, since the terms of the lease were made on the mistaken assumption that the property was not subject to the Rent Restrictions Acts and so according to the record of that property could only raise £140 pa in rent.  What was important in that case was that the landlord, had he known this, could have increased the rent to £250 in respect of his expenditure on improvements to the property, so that he would have legally been able to obtain £250 pa in any case.  Hence, to bring about a legal rent charge it was imperative to order a rescission of the contract so that the correct method of evaluating the rent could be enforced.  Denning LJ’s solution was to interpret the test of Lord Atkin in Bell v Lever Bros very narrowly, saying that even a fundamental mistake did not make a contract void at law but took effect only in equity.  He said that ‘the correct interpretation of that case, to my mind, is that once a contract has been made, that is to say, once the parties, whatever their inmost states of mind, have to all outward appearances agreed with sufficient certainty in the same terms on the same subject-matter, then the contract is good unless and until it is set aside for breach of some condition expressed or implied in it, or for fraud, or on some equitable ground.’  On this basis, it was found that there was a valid contract in law, but that it could be rescinded in equity.  The broad flexibility of an equitable remedy was favoured over the narrow doctrine of mistake at common law.  This solution did justice in that particular case.

But there has been great confusion in trying to reconcile this decision with Bell v Lever Bros.  In the case of Associated Japanese Bank v Credit du Nord SA (1988), Steyn J distinguished the decision in Bell v Lever Bros as ‘rooted in the particular facts of that case’, He highlighted the fact that Lever Bros Ltd derived benefits from the contract in dispute: they were ‘most anxious, because of a corporate merger, to terminate the two service agreements’; it was not clear that they would not have entered into the disputed contract if they had known of the voidability of the service agreements; and it was Lever Bros Ltd were interested in securing the future cooperation of the two employees in carrying through the proposed merger.  In the Associated Japanese Bank case, there were no similar factors which could be said, on the ‘merits’, to tip the balance in favour of upholding the contract.  There was, moreover, an explicit finding that both parties believed that the machine existed and that neither of them would, if aware of the true facts, have for one moment contemplated entering into the transaction.  Steyn J said, that there is therefore no reason to doubt the substantive reasons emerging from the speeches of the majority.  However, the difficulty with this attempt to reconcile the case of Solle v Butcher with Bell v Lever Bros is that in Bell v Lever Bros, Lord Atkin gives several examples of mistakes which would not make a contract void at law, such as the sale of a horse mistakenly believed to be sound, or of a dwelling house mistakenly believed to be inhabitable or of a picture mistakenly believed to be an old master but which is in fact a modern copy.  These examples seem to show that Lord Atkin did not intend to confine himself to the special facts before him, but intended to formulate principles of more general application.  Perhaps, as Treitel submits (104 LQR 501 at 507), the difference in result in the cases of Bell v Lever Bros and Associated Japanese Bank illustrates the conflict of policies: in Bell v Lever Bros it was respect for the sanctity of contract which prevailed, while in Associated Japanese Bank this yielded to ‘the need to give effect to the reasonable expectations of honest men’.

While Steyn J was able to reconcile the case of Bell v Lever Bros with the majority in Solle v Butcher, he was unable to accept the view of Denning LJ in that case: he dismissed the view of Denning LJ as ‘an individual opinion’ saying that ‘With profoundest respect to the former Master of the Rolls, I am constrained to say that in my view his interpretation of Bell v Lever Bros does not adequately reflect the views of the majority.’  On his view, therefore, it was still perfectly possible to hold that a fundamental common mistake could make a contract void at law without resorting to equitable principles, but at the same time hold that a contract not void in law could be set aside on terms in equity.  The equitable jurisdiction still existed, but the common law doctrine Bell v Lever Bros was not rendered a nullity at the same time.  This compromise was found unacceptable in The Great Peace, and the reasons given there for the decision to reject the equitable power to rescind altogether need to be examined.  

The first, and most obvious, point is that it is not tenable to presume that the House of Lords in Bell v Lever Bros was ignoring the position in equity in coming to their decision.  This is a strong argument, for according to the hierarchy of the courts it would not be open to a Court of Appeal go against the position adopted in the House of Lords.  But there is much confusion surrounding the case and different interpretations have been proposed.  Did the fact that their Lordships did not seek to make a distinction between common law & equitable principles of mistake mean that it was a decision at common law alone, and that it did not involve any equitable principles, so that it is theoretically arguable that the case might have been decided differently in equity?  This appears to be the view propounded by Denning LJ in Solle v Butcher. But his view can no longer stand – the House of Lords must be presumed to have been determining the position both at common law and in equity.

Secondly, it was said in The Great Peace that if the result in Solle v Butcher was extended beyond any previous decision on the scope of the equitable jurisdiction to rescind a contract for common mistake, the terms of Denning LJ’s judgment left unclear the precise parameters of that jurisdiction.  While the mistake had to be ‘fundamental’ to give rise to an equitable remedy, how far did this extend beyond Lord Atkin’s test of a mistake ‘as to the existence of some quality which makes the thing without the quality essentially different from the thing it was believed to be’?  On true construction of the two arguments, it appears that the requirement of Denning LJ of a ‘fundamental’ mistake is exactly the same as Lord Atkin’s strict requirements as to the mistake in the quality of the subject-matter of the contract.  Therefore for Denning LJ to say that a contract cannot be rescinded at common law even where even where the mistake is fundamental is a direct contradiction of that House of Lords decision and cannot stand.  The effect of Solle v Butcher was not to supplement or mitigate the common law, as it purported to do, but rather to hold that Bell v Lever Bros was wrongly decided.  Steyn J in The Great Peace said that the proper method of limiting the range of circumstances in which mistake will render a contract liable for rescission is by means of common law principles, in other words it is the line drawn in Bell v Lever Bros.  There is no separate doctrine of common mistake in equity which enables the courts to intervene in circumstances where the mistake does not render the contract void under common law.

It is important to realise that the Court of Appeal in The Great Peace did have in mind the important factors of justice weighing towards acceptance of an equitable jurisdiction to rescind on terms where a common fundamental mistake has induced a contract, as in Solle v Butcher.  It was seen that such a jurisdiction gives far greater flexibility than a doctrine of common law which holds a contract void in such circumstances.  But it was submitted in The Great Peace that legislation may be the solution to this – just as the Law Reform (Frustrated Contracts) Act 1943 was needed to temper the effect of the common law doctrine of frustration, so there is scope for legislation to give greater flexibility to our law of mistake than the common law allows.  This would be better than seeking a solution by extending the equitable jurisdiction at the expense of destroying any coherence in this area of the law.

It is clear that the law in the area of mistake is troubled by the competing interests at stake.  For where a common mistaken assumption was the basis for the parties entering into a contract, the court will be faced with the choice of rescinding the contract in favour of one innocent party or with holding it valid in favour of the other innocent party.  The Great Peace has, for the sake of clarity, recently held that there exists no equitable jurisdiction to rescind on terms a contract in circumstances which fall short of those in which the common law held a common void, for, on the tests as prescribed in Bell v Lever Bros in respect of common law and in Solle v Butcher in respect of equity, it is not possible to distinguish between a mistake which was fundamental in equity and one which had a quality which made the thing contracted for essentially different from the thing it was believed to be at common law.  Consequently, Solle v Butcher has not been followed.  While this means that it may not always be possible to do justice in a particular case, it is no pity that the courts should encourage contracting parties to insert a term in contracts relating to who amongst them should bear the risk of there having been a mistaken assumption.  In any case, it should be remembered that a key factor in the cases on common mistake is that both parties are innocent with respect to that mistake.  Where the fault can be attributed to one or other of the parties, the case may fall within the scope of the misrepresentation rules.