TOPIC 5(B): MISTAKE

TOPIC 5(b): MISTAKE

General rule:

·  Parties cannot avoid contractual obligations by claiming mistake.

·  Contract will usually ALLOCATE the risk:

o  Caveat emptor (buyer beware)

o  Caveat venditor (seller beware)

Common law and equity:

·  CL: restrictive, contract usually stands

o  Consequence of vitiating contract is drastic à ab initio (from beginning).

o  Inconvenient if already commenced

o  Interests of 3rd parties.

·  E: ensures that enforcing contract is not unconscionable

o  Gives relief in more instances.

o  Treats contract as VOIDABLE, rather than void.

1. COMMON MISTAKE (first category of mistake)

Parties in agreement BOTH in error assume some matter to be true.

(A) Common mistake at common law (3 Types)

Common mistake void at common law where:

·  common assumption of state of affairs

·  no warranty by either party as to existence (as in McRae)

·  no party at fault for mistake

·  mistake goes to the subject matter of the contract rather than qualities

Remedy at Common Law:

If successful the contract is void ab initio

1. Res Extincta (the thing has perished)

·  Absence of subject matter of contract

The subject matter does not exist at the time of formation of the contract

·  s11 Sale of Goods Act, 1923 (NSW) 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 void”

·  Neither seller/purchaser is liable.

·  False Common Mistake

·  McRae v Commonwealth Disposals Commission: C tenders for oil tanker described as wrecked at certain location in Papua. M intent to salvage, tender and accepted. Incurred expenses in preparation then discover there was no tanker.

·  Trial judge: no claim for breach of conduct as there was no tanker – void.

·  HC: there was contract as M impliedly promised that there was tanker in position specified. s11 not apply as goods had not “perished”, but never existed.

2. Res Sua (I already own the thing)

The subject matter is not owned by the transferor but is already owned by the transferee.

·  Void for failure of consideration: Cooper v Phibbs – salmon fishery

3. Mistake as to Subject Matter – substance v quality

Common law: fundamental mistake as to quality of subject matter not void.

·  Bell v Lever Bros: B appointed chairman of company by LB for 5 years. After 2 years, LB terminate B’s services with compensation. Then discovered that B had done breaches of duty as chairman which justified dismissal without compensation. LB argue: void for fundamental mistake as to quality of subject matter (the contract of service).

·  HOL: not void. Lord Atkin: common mistake must be as to existence of some quality that makes the thing without the quality essentially different from the thing as it was believed to be.

·  Denning LJ in Solle v Butcher interpreted: contract is good even if mistake was fundamental or that other party knew he was mistaken.

·  Great Peace Shipping Ltd v Tsavliris: D contracted to give salvage services to Cape Providence, vessel with serious structural damage. D told by 3rd party that GP was 35 miles away from vessel. D contracted with GP to stand by CP if crew needed rescue. GP changed course to go to CP but D realised that ships were in fact 410 miles apart. D did not cancel contract, but after a few hours once made contract with closer ship.

·  COA: D would have case if distance between 2 vessels “so great…as to render the contractual adventure impossible of performance”. However GP able to arrive in time to provide several days of service. Thus services by GP not essentially different and D’s failure to cancel contract straightaway also telling.

·  Rejected Denning LJ’s interpretation of Bell v Lever Bros.

(B) Common Mistake in Equity

Equity has three remedies

1.  refusal (or a defence) to grant specific performance

2.  set aside a contract and adjust terms (voidable contract)

3.  rectification (rewrite offending clause)

1. Refuse Specific Performance (equity)

·  Equity will not enliven a common law void contract.

Associated Japanese Bank v Credit du Nord

The court will first see if there is a mistake at common law then move to consider any possible solutions in equity

2. Setting Aside the Contract - voidable

·  Solle v Butcher: flat altered and let for 7 years on $250 pa. Both thought that alterations meant flat not governed by rent control law (only $140 pa). If lessor knew, he would have just given notice of rent increase, but could not do AFTER lease executed. Lessee after 2 years sued for restitution of overpaid amounts and declaration that he could remain as tenant on lower rent. Lessor (D) argued mistake and unfair that he should receive rent of only 140 for next 5 years. English COA: lease voidable at terms laid down by court.

·  From Bell v Lever Bros: contract not void ab initio in CL – even though mistake fundamental

·  Contract can be voidable at equity if:

·  common misapprehension of a fundamental nature;

·  party using mistake not at fault;

·  unconscionable for other party to benefit by mistake

·  rights of third parties not affected

·  But OVERRULED (not good law in England) in:

·  Great Peace Shipping v Tsuviliris Salvage: fundamental misapprehension in equity contradicted common law principle in Bell v Lever Bros. Not possible to distinguish between “fundamental” mistake and mistake that is void under common law.

·  Harris v Digital Pulse (NSW )

·  Acknowledges but does not affirm Great Peace

·  Pacer v Westpac Banking Corporation (unreported NSWSC 2 August 1996)

o  Based on unconscionability in seeking to enforce – may be some difficulties in this application

·  Svanosio v McNamara: D sold P land with hotel on it. Afterwards found only part of hotel stood on land and other 1/3 was on land owned by Crown. P claimed should be voidable as common mistake as to quality, quantity and title of land.

o  Dixon CJ and Fullagar J: approved Solle v Butcher Denning LJ view that contract is good (despite fundamental mistake) unless and until voidable on equity. But also restricted that equity cannot give proper relief unless there had been fraud…or a condition can be found express or implied in the contract.

o  Dismissed claim: equity cannot undo sale of land (special category)unless there was fraud or total failure of consideration.

·  Taylor v Johnson: agreed with Svanosio v McNamara but that “fraud” meant unconscionable dealing.

3.  Rectification – rectify mistake doc to reflect true intention of parties

Elements:

·  oral agreement where terms were incorrectly transcribed into written agreement

·  mistake common to both parties; and

·  mistake must be obvious

·  omitted provision must be capable of clear proof

·  no other bar to using equitable remedy (eg delay)

Maralinga v Major Enterprises: ME put land for sale by auction, with mortgage back to seller for $64500 for 3 yrs at 8%. M bought at $155000. Draft contract said purchase price on completion but not for any part of price to remain on mortgage. M and ME signed knowing this omission. M thought it could still have benefit of mortgage. Sought rectification as end of auction there was an agreement of mortgage and written contract did not conform to that agreement.

·  HC: refused rectification.

·  No mistake as to what contract contained, both knew it was different from original agreement.

·  Must establish that writing was intended to record EARLIER agreement.

Pukallus v Cameron: written agreement for sale of land ‘Subdivision 1 of Portion 1154’. Both parties thought this included a bore and are of cultivated land which they inspected together before contract. After contract, purchaser found that area was in Subdivision 2.

·  Trial judge: contract rectified.

·  HC: written contract did embody intention of parties which was to transfer Subdivision 1. No evidence of intention to contract for THAT area of land.

·  Must prove precise term that was agreed and mistakenly omitted.

·  Must prove that parties intended to contract another way.

Comissioner of Stamp Duties v Carlenka Pty Ltd: amendment to trust deed intended to permit distribution of income to particular beneficiary. Words used unintentionally allowed beneficiary to share in capital of trust and result in adverse stamp duty consequences.

·  Trial judge: contract rectified

·  COA: upheld.

·  Rectification available where parties have deliberately used words, which when properly construed do not mean what they intended (aka parties mistaken as to meaning or effect of words).

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2. MUTUAL MISTAKE

·  parties at cross purposes – no consensus

·  objective test applies

(a) Common law

Raffles v Wichelhaus: D bought 125 bags of cotton to arrive ex Peerless from Bombay. Cotton arrived by D refused to accept. D claim he intended to receive cotton from Peerless that sailed in October, but P proffered cotton from ship of same name that left in December.

·  Court: agreed with D. Each party intended a different ship – no consensus.

·  Effect of mistake: void contract

(b) Equity

·  follows common law, but if the contract is not void at common law, equity may refuse specific performance

·  rectification not possible

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3. UNILATERAL MISTAKE

·  Only one person makes the mistake and other party knows or ought to know

·  The mistake must relate to a fundamental of the contract

(A)Unilateral mistake at common law

Effect: void - no contract and property returns to original owner

(i) Mistaken Identity Cases

Mistake as to identity not attributes (a quality)

Parties face to face (inter praesentes):

·  Presumption: You intend to contract with the person who is standing in front of you (Shogun Finance Ltd v Hudson).

·  Objective test.

Phillips v Brooks: rogue posed as someone else and induced jeweller to let him take ring in exchange for cheque. Claim of conversion – failed.

·  Mistake as to attributes – not good

·  Fraudulent misrepresentation AFTER conclusion of contract – not good.

·  Affirmed by Lewis v Averay

Ingram v Little: rogue posed as someone else and induced 3 ladies to hand over their car in exchange for cheque. Claim of conversion – succeeded.

·  Mistake as to identity – good.

·  Fraudulent misrepresentation BEFORE conclusion of contract – good.

·  Taken to be wrongly decided.

Lewis v Averay: L sell car to rogue, who claimed to be Richard Greene. Rogue wrote cheque. Lewis ask rogue for proof of identity then gave over car. Check bounced. Rogue later sold car to Averay, 3rd party. L sewed A for conversion. COA: failed.

·  Mistake as to identity does not mean no contract.

·  Is just voidable for the mistaken party, but must be done BEFORE 3rd party has acquired rights of it.

·  Denning MR rejected: distinction between mistake as to attributes/identity and between fraud committed before/after conclusion of contract.

Parties not face to face:

To argue mistake, need to prove:

·  A’s identity of vital importance

·  B took reasonable steps to ascertain A’s identity

·  A is aware of B’s intentions

Boulton v Jones: J sent order to Brocklehurst for pipe hose. Brocklehurst owned J money and just sold business to B. B sent goods to J, who later refused to pay. Court: held. J intended to contract with Brocklehurst and B misled him by executing order.

·  Identity of supplier important – owed him money.

Cundy v Lindsay: rogue sent order for handkerchiefs for L, giving address. Signed name to look like Blenkiron & Co (firm known to L). L sent goods to B & C and rogue took possession. Did not pay and sold to C. L sued C in conversion. HOL – succeed.

·  No contract as between L and rogue as L intended to deal with B & C.

·  Mistake as to identity à void.

Kings Norton Metal Co Ltd v Edridge Merrett & Co: rogue wrote to P on impressive note paper bearing name Hallam & Co asking for quotation on brass rivet wire. H&C ordered wire but did not pay. H&C did not exist. Wire sold to D by rogue and P sued D in conversion. Trial: no success, contract exist. Pass of goods between rogue and D took place before P had rescinded contract. COA: upheld.

·  P contract with writer of letters, H&C and rogue were the same entity.

·  Mistake as to attributes à not void.

Shogun Finance Ltd v Hudson: rogue got driver’s license of Mr Durlabh Patel and used to get car from Shogun. Arranged by car dealer sending Shogun copy of driver’s license and application form with forged signature. Shogun checked Patel’s credit/employment before approving. Rogue sold car to Hudson. Shogun claimed car was theirs on basis of “one cannot give what one does not have”, which needs to establish contract between Shogun and rogue. HOL held contract void.

·  Contract was between Patel and Shogun (identity of consumer is fundamental because of credit).

·  No consensus as Shogun intended to contract with Patel.

(ii) Mistakenly signed document - non est factum (not my deed)

Rules (Gallie v Lee):

·  Mistaken party was under a disability

·  Document signed is different in substance to what mistaken party thought he/she was signing

·  Mistaken party was not negligent in their failure to read/understand document

·  There is a heavy burden on person who seeks this rule.

Saunders v Anglia Building Society: Mrs Gallie (78 widow) owned leasehold house. Gave title deeds to nephew Parkin so he could raise money on security of house. P did not want to raise money himself and arranged to transfer land to Lee so he could raise money on mortgage of house and pay P. Doc drawn up and Mrs Gallie signed doc without reading because glasses broken. L told her doc was deed of gift to P and P witnessed doc. L raised money by mortgaging to building to ABS. Did not pay any money to P and defaulted in payments to ABS. Gallie (executor Saunders) claimed void. HOL: reject.