Managing Contracts and Liability - Law of Mistake in the UK

Introduction

Mistakes at law may affect the validity of the formation of a contract. The effect of a mistake on the validity of a contract depends on the type and nature of the mistake made. The general rule is that where a mistake has been made by the parties, at common law the contract may be deemed void, as if the contract had never existed. Equity takes a more flexible approach in that contracts containing certain mistakes may be treated as voidable, where either party can terminate the contract. However, a fundamental mistake, often referred to as an ‘operative’ mistake, may render a contract void.

1. Common Mistakes

Where a common mistake occurs, the parties appear to be in agreement, but have entered into the contract under the same misapprehension. Where such a mistake is fundamental to the contract, it may be ‘void ab initio’ (void from the very beginning). In the case of Bell v Lever Bros (1932), it was held that for a common mistake to be operative the mistake ‘must go to the root of the contract’.

(i) Mistake as to the existence of the subject matter

Where the subject matter of the contract does not exist or ceases to exist, it may be void at common law. In the case of Couturier v Hastie (1856), a buyer bought a cargo of corn which both parties believed to be at sea. The cargo had to be disposed of and the court held that the contract was void as the subject matter ceased to exist.

However, it depends upon the construction of the contract as to whether it will be deemed void or valid. Where performance is guaranteed or there is the purchase of a ‘chance’, the contract will be valid. In the case of McRae v Commonwealth Disposals Commission (1951), McRae was sold the right to salvage a tanker of a specific reef, but neither existed. The court held that there was a valid contract as there was an implied guarantee that the tanker existed.

(ii) Mistake as to title

Where there is an agreement to transfer property from one person to another, but the buyer already owns the property and neither party is aware of this, the contract will be void at common law.

(iii) Mistake as to quality

A mistake as to the quality of the subject matter will not render a contract void at common law. In Leaf v International Galleries (1950), both parties mistakenly believed that a painting was by Constable. The court held that the contract was still valid.

However, where a mistake as to quality is fundamental, it has been argued that this could render a contract void. In particular, Lord Atkin in Bell v Lever Bros stated that ‘A contract may be void if the mistake is as to the existence of some quality which makes the thing without that quality essentially different from the thing it was believed to be’.

(iv) Mistake as to the possibility of performing the contract

Where the obligations under the contract are impossible to perform, the contract will be deemed void. In Sheik Bros Ltd v Ochsner (1957), the land was not capable of the growing the crops contracted for, so the contract was held to be void.

(v) Mistake in equity

Where a contract is void on the grounds of common mistake, the court will either refuse specific performance in equity or it can grant rescission and impose terms if necessary.

If it is a mistake as to quality, even though the contract may be valid at common law, it may still be deemed voidable in equity. In the case of Solle v Butcher (1950), the Court of Appeal set the contract aside in equity, even though it was valid at common law and imposed terms to do justice.

2. Mutual Mistakes

Where a mutual mistake occurs, there is a misunderstanding between the parties as to each other’s intentions and they are said to be at cross-purposes. A mutual mistake negates consent and therefore no agreement is said to have been formed at all.

(i) Mutual mistake as to the identity of the subject matter

Where there is ambiguity as to the understanding of the agreement, the contract will be deemed void. In determining this, the court applied an objective test asking whether a reasonable third party would take the agreement to mean what one party thought it meant, or what the other party thought it meant. In the case of Raffles v Wichelhaus (1864), the court held that there was no agreement as the parties were thinking of two different ships when they entered into the agreement and it was therefore too ambiguous to enforce. This can be contrasted with the case of Smith v Hughes (1971) where the mistake related to the quality, not the identity of the subject matter and the court held that the agreement was valid.

(ii) Mutual mistake in equity

Where a contract is void on the grounds of mutual mistake, the court will refuse specific performance in equity and if necessary, rescind the contract.

3. Unilateral Mistakes

A unilateral mistake is where only one party is mistaken and the other party knows about it and takes advantage of the error. A unilateral mistake also negates consent and the existence of an agreement.

(i) Unilateral mistake as to the terms of the contract

For a unilateral mistake to be operative, it must relate to the terms of the contract. This type of mistake occurs where one party is aware of the mistake and takes advantage of the other party’s error. Such a mistake will render the contract void.

In the case of Hartog v Colin and Shields (1939) the seller had made a mistake as to the price of goods and it was held that the buyer must have realised the mistake and as it concerned a term of the contract, the contract was held to be void.

A unilateral mistake as to the quality of the subject matter will not render the contract void. In Smith v Hughes the contract was for the sale of ‘oats’. The buyer believed they were ‘old oats’, but they were not. However, the contract was still held to be valid as the sale of ‘old oats’ was not a term of the contract.

(ii) Unilateral mistake in equity

Where a contract is void on the grounds of unilateral mistake, the court will refuse specific performance in equity and if necessary, rescind the contract.

4. Mistake as to identity

Where a mistake as to the identity of the other party to the contract is made, the contract will be deemed void if the identity of that person is central to the contract. However, where the parties negotiate in person, there is a presumption that there is an intention to do business with the person in their presence, in which case it is unlikely that a contract will be void, as is demonstrated by the case of Phillips v Brooks (1919). The contract was held to be valid where a jeweller sold goods to someone who purported to be someone else as he had intended to do business with that particular person, even though he was not who the jeweller thought he was.

Conclusion

Depending on the type of mistake made and whether it is considered ‘fundamental’, a contract may be deemed void. In a contract dispute where the agreement is deemed valid, or indeed void at common law, equity may intervene in which case a contract may be deemed voidable. This creates a more flexible approach which in certain circumstances gives either party the option of terminating the contract rather than the courts simply rendering the contract either valid or void.