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Mistake Notes

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This is an extract of our Mistake document, which we sell as part of our Contracts 2 Notes collection written by the top tier of University Of New South Wales students.

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Mistake

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If a mistake is positively induced by the other party into the contract - one may claim in misrepresentation/misleading conduct o But mistakes that are self-induced or spontaneous are much less likely to afford mistaken parties a remedy The common law and equity

* The common law recognizes mistake as a vitiating factor in very few instances - it threatens commercial certainty and it makes an objectively valid contract ab initio which can be inconvenient if performance has already commenced

* Equity recognizes mistake in more instances since it treats contracts as voidable (can be rescinded at the election of the mistaken party) o In order for the contract to be set aside it must be possible to substantially restore the parties to the position they were in before the contract was made Theories

* There are competing theories as to whether or not mistake is an independent doctrine - it may well be subsumed under traditional questions of agreement, construction and implied terms (implied condition precedent). o Under Roman law mistake was posited as an independent doctrine based on impaired consent Categorization of mistakes

* There are two main types of mistakes o Common mistakes as to a fundamental matter (e.g. both parties erroneously believe in the existence of a thing) o Parties are not in actual subjective agreement - e.g. intending to contract on different terms:If they misunderstand each other it may be a "mutual mistake" but if one party knows of the other's error or is objectively right the mistake may be regarded as "unilateral"

Parties in Agreement

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This concerns issues where the parties have reached consensus ad idem but make the same false assumption in respect of a fundamental matter o The question is whether the contract should stand, or should it be void/voidable for mistake, or whether the document on which the contract is recorded should be rectified Mistakes as to the existence of a subject matter

* There are three constructionist interpretations as to the existence of a subject matter: o A promise of existence which places the risk on the promisor - if the thing does not exist the promisor is liable for breach, or in the case it has been paid for the promisee may claim for total failure of consideration o The promisee took the risk that the art collection may have perished (e.g. promise to pay for a chance that it existed) - again there is a valid contract but the promisee is liable for breach on non-payment o There is an implied condition precedent of existence of the thing 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):

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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

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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.

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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

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But since the case was one of construction:

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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.

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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

Mistake as to quality of subject matter 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):

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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

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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

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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

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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?

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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

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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

o

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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"

"Once a contract has been made, that is to say, once the parties...have to all outward appearances agreed with sufficient certainty in the same terms on the same subject matter, then the contract is good unless it is set aside for failure of some condition on which the existence of the contract depends, or fraud, or on some equitable ground" - Denning J in Solle v Butcher explaining Bell

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
PS250/year. The flat was previously let to Taylor for PS140. 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 PS140 unless notice is given. S sought a declaration that the maximum rent was PS140/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):

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The tenant's argument wins as long as the lease stands - the PS250 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)

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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)

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

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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

o

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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 PS250 could be charged) and a common misapprehension (since most of the latter are due to the former)

Though equity generally only gives relief through rescission when the parties can be restored to substantially the same position before the contact was made - the court's practice is to give relief whenever it can do what is 'practically just'

o

Just as in Cooper v Phibbs, terms can be implied to ensure such a result - here the lease should be set aside if the defendant is prepared to permit the plaintiff to be a licensee, and while he is a notice should be served permitting the increase to PS250

Order: Appeal allowed, declaration of maximum rent granted. Counterclaim for lease to be set aside granted. Counterclaim for excess rent dismissed....

Great Peace Shipping v Tsavliris Salvage (International) [2003] QB 679 Facts: G (defendants) contracted to provide salvage services to a ship (CP) which suffered serious structural damage. The nearest tug was 5-6 days away and G were told by a 3 rd party that the T's ship (GP) was 35 miles away from CP. G contracted with T for $16.5k/day to a minimum of 82.5k (the latter was also the cancellation fee. Almost immediately after GP changed course to rendezvous at CP, G became aware that CP and GP were in fact 410 miles apart. G cancelled the agreement after a few hours, after locating another ship (N). G refused to pay any amount but T sought 82.5k Ratio (Lord Phillips of Worth, Matravers MR, May and Laws LJJ): Issue 1: Can the decisions of Bell and Solle be reconciled?

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The equitable jurisdiction asserted by Denning in Solle was a significant extension of any jurisdiction exercised up to that point and one not readily reconcilable with the result in Bell

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There is no question as to the purpose of equity in mitigating the CLAW's rigidity - only to the ambit of Bell and hence where the common law should draw the line. The effect of Solle was not to supplement the CLA but to say it was wrongly decided

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To restore coherence to the law: there is no jurisdiction to grant rescission of a contract on the

ground of common mistake where that contract is valid and enforceable on ordinary principles of common law. Issue 2: Applying Bell to this case

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The trial judge's suggestion that the CP should have altered course so that it would head towards the GP to reduce the interval from which they were in attendance was unrealistic

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But we do not agree with counsel's submission that evidence of not wanting to cancel unless an alternative was present was wrongly admitted

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This was a telling indication that the ship's proximity didn't mean the services that the GP was in a position to provide were essentially different from those which they had envisaged when the contract was concluded

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The defendants would have wished for the contract to be performed but for the arrival of another vessel capable of performing the same services - their proximity did not mean it was impossible for the venture to be performed (else they wouldn't have held on)

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The parties entered into a binding contract subject to a cancellation fee - they became liable for it on engaging N

Order: Appeal dismissed

Svansio v McNamara (1956) 96 CLR 186 Relevant Facts: M (the vendor/executors of the estate) entered into a contracted with S (the purchaser) under which they agreed to sell land in respect of a hotel erected upon it. Only a cursory examination was undertaken as to the vendor's title. The conveyance was executed and the licence transferred. It was discovered a few months later that the hotel was only partially built on the land conveyed and that a substantial part of it stood on unalienated Crown land. Both parties assumed the hotel was erected on the conveyed land. S commenced an action against M, claiming a declaration the contract was void for mistake, seeking to set aside conveyance and for payment of the purchase price. Failing at first instance he appealed to the High Court. Ratio (McTiernan, Williams and Webb JJ):

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Such a mistaken belief as to the description of the land could not possibly avoid/void a contract which contemplates and provides for it

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Cases in which relief on the basis of common mistake must be very rare and are unlikely to go beyond cases where there has been a total failure of consideration - but there is dicta in some cases to suggest it is possible in cases of common mistake as to a material point and partial failure of consideration (Jones v Clifford, Debenham v Sawbridge)

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Contracts concerning existence are either : unenforceable if executory or recoverable on the basis of total failure of consideration if executed.

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None of the case law suggests that an executed contract for the sale of property can be rescinded for an innocent material misrepresentation or a material common mistake as was

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