#7307 - Mistake - Contracts 2

McRae v Commonwealth Disposals Commission (1951) 84 CLR 377

See pg44 for Relevant Facts

Issue: The court had to decide on what basis the two parties contract wrt the existence of the oil tanker

Ratio (Dixon and Fullagar JJ):

• The court resolved the case of Couterier v Haste (corn shipped to port by party A and became heated/fermented – party B repudiates – Party A was W&A to hand over shipping documents, party B sued for price) court considered that the case was one of construction, not mistake (what was party A actually obliged to do) – it was a total failure of consideration

• The court rejected to some extent that the civilian doctrine of mistake had no application where the common law basis of contract was a promise supported by consideration – the question being what is the true construction of the promise.

• They said that even if the case was one of mistake then the Commission cannot rely on their own mistake – they were guilty of the grossest negligence, they had no reasonable grounds for the belief and they deliberately induced the belief

• But since the case was one of construction:

  • The case was not one in which there was an implied condition precedent (based on the terms and surrounding circumstances). Here the buyers relied and acted upon the assumption that a tanker was in existence – there was no common assumption on the part of both the parties to justify the implication of a condition precedent.

  • While the commission officers made an assumption – the plaintiffs did not. The plaintiffs would have believed that they would accept the Commission’s assurance that there was a tanker in existence

Decision: There was a valid contract in existence - Appeal Allowed

Bell v Lever Brothers Ltd [1932] AC 161

Relevant Facts: L held more than 99% of share capital in Niger Co Ltd. If appointed B as managing director of it for five years at an annual salary of 8k. Three years in, Niger was amalgamated and B’s contract had to be terminated. L agreed to pay him 30k in compensation for loss of employment. After this is paid, it was discovered that B committed several breaches of duty that would have entitled L to dismiss without compensation. L commenced an action against B, claiming the compensation agreement was void for mistake and hence it was entitled to recover money paid over. L was successful at first instance, B appealed to the HoL.

Ratio (Lord Atkin):

• In cases of mistake as to quality the question is whether or not it is a mistake of both parties, and it is a mistake as to the existence of some quality which makes the thing without the quality essentially different from the thing as it was believed to be

• It is wrong to decide that an agreement to terminate a definite specified contract is void if it turns out that the agreement had already been broken and could have been terminated otherwise

  • The contract released is the same, regardless of whether it has been broken or could have been terminated – the party paying for release gets exactly what they bargained for

  • If parties honestly comply with the essentials of formation (agreeing on the same terms, on the same subject matter) they are bound and must rely on the stipulations of the contract for protections from the effect of facts unknown to them

Can this also be expressed as a matter of mutual mistake?

• The proposition as to mistake amounts to no more than: If the contract expressly or impliedly contains a term that a particular assumption is a condition of the contract, the contract is avoided if the assumption is not true

• In deciding this the words “in the contemplation of both parties fundamental to the continued validity of the contract” or “a foundation essential to its existence” are apt to refer to the appropriate test

  • But “a fundamental reason for making it” is not – it would allow the construction, for parties, contracts which they have not made in terms, through the importation of conditions that make the contract more “just”

• The identity of the subject matter was not destroyed by mutual mistake??

Order: Appeal Allowed

Lord Warrington of Clyffe dissented – he believed that the erroneous assumption (that the other contract not was broken/terminable) was essential to the contract and would not have been made without it (this is what he regarded as the relevant test). His reason was that the parties were negotiating on terms concerning the premature determination of the contract and compensation and these were fundamental to the bargain as any error “one can imagine”

Solle v Butcher [1950] 1 KB 671

Relevant Facts: B (landlord, plaintiff) leased a flat to S (tenant, defendant) for a term of 7 years for 250/year. The flat was previously let to Taylor for 140. Both B and S believed that because of structural alterations the flat wasn’t governed by the Rent Restriction Acts. This was incorrect hence the maximum rent allowable under the Act was 140 unless notice is given.

S sought a declaration that the maximum rent was 140/year and that he was entitled to recover excesses paid. B resisted and counterclaimed for rescission on the basis of common mistake.

Ratio (Denning J):

• The tenant’s argument wins as long as the lease stands – the 250 was invalid and the landlord cannot do anything to repair his omission since a fresh notice of increase cannot be effective if the lease continued. He must avoid the lease (mistake)

• The only type of mistake that renders a contract void is at common law and that is a mistake that was such as to prevent formation of the contract at all. Cases of sale of goods not in existence are not void by mistake, but by an implied condition precedent (that the goods exist)

  • There clearly was a contract here – the parties agreed on the same terms on the same subject matter

  • Though the landlord was under a fundamental mistake – this is not ground for saying the contract was a nullity. To say so would be to say that in all cases where both parties believe the house is outside the RR Acts the contract is void.

• In equity a contract may be set aside (voidable) if the parties are at a common misapprehension as to facts or as to their relative rights (including disputed rights – e.g. tenancy in Cooper v Phibbs) providing the misapprehension is fundamental and that the party seeking to set it aside is not himself at fault

  • There is no distinction between rescission for an innocent misrepresentation (which it was in this case – the plaintiff was the surveyor who informed the defendant of his belief that 250 could be charged) and a common misapprehension (since most of...