Mistake On Contract Law - Case Study Example

Mistake On Contract Law Abstract This essay presents arguments to support a disagreement in the statement of Ewan McKendrick that after the case of Great Peace Shipping Ltd. v Tsavrilis Salvage Ltd. [2003] QB 679, “the doctrine of [common law] mistake has been reduced to almost to a vanishing point”. It will compare the decision of the court in Bell v Lever Bros. Ltd [1932] AC 161 as against that in Solle v Butcher [1950] 1 KB 671. By looking closely at the commonalities of the 2 cases, what becomes apparent will be the ramifications of its reconciliation in the Great Peace case. As a landmark decision, Great Peace has been observed by various other sources as the final arbiter of the confusion that arose out of the Solle case. The essay will cite various sources that share a common observation of the impact that Great Peace has on contractual law, particularly on the disposition of issues relating to mutual mistake. Contract law mistake Before proceeding to establish a position relative to the statement under scrutiny, it is essential to first understand, in the proper context, the “mistake” being alluded to as the core of the case in point. When parties enter into a contract, it is with the understanding that both sides understood what they were contracting about. However, there are instances when an incorrect belief as to a matter relevant to that contract gives rise to a situation wherein one party was mistaken but the other was not. This is referred to as unilateral mistakes and generally will not void a contract in the absence of vitiation of consent through fraud or deliberate misrepresentation. Nevertheless, there are situations where the mistake is suffered by both contracting parties. In this situation there are 2 types of mistakes recognized, common mistake and mutual mistake, although the two can sometimes be used interchangeably. Strictly speaking, there is common mistake when both parties essentially make the same false and fundamental assumption of a fact. It is the opinion of some commentators that this does not necessarily render the contract void. However, if the common mistake relates to the existence of the subject matter of the contract such that it either does not exist or has ceased to exist without the knowledge of the parties, then the contract is void. Even under these circumstances, the contract will not be automatically voided if a) there was a warranty by one party, b) misrepresentation of the existence of the subject matter by one party, c) if one party assumed the risk of the existence of the subject matter and d) when there exists an overlap between the doctrine of mistake and the doctrine of implied terms.1 Mutual mistake happens when both parties misunderstand each other’s intentions and are at cross-purposes. Compared to common mistake, here the parties do not actually make the same mistake but are proceeding on different assumptions. Ordinarily, this mistake will void a contract because it negatives consent. However, it has been argued that if by the behaviour or conduct of one party the other party is led to believe that the former was agreeing to the terms proposed by the latter, then the mistake will not necessarily be a ground to void the contract despite their obvious disagreement as to the purposes for such contract. Applying the above considerations to the Great Peace case, there was a common mistake which related to the misapprehension by both parties of the close proximity of their respective ships to one another on the basis of the information that was relayed to them by a third party. Consequential to this erroneous information, both parties proceeded to perfecting the contract to avail of the service of Great Peace for a minimum of 5 days to stand-post for assistance in case of any untoward incident that was then most likely to occur to the casualty ship Cape Providence. Tsavrilis Salvage Ltd.was hired to provide a tugboat with which to tow the ailing vessel to port but it would take 5 days for the tugboat to rendezvous with the Cape Providence.. The appellant Great Peace Shipping Ltd., owner of the vessel Great Peace contended that the contract was complete and binding in itself despite the common mistake of both parties as to that particular fact because such mistake did not alter in any way the fundamental purpose of the contract. It was the contention of appellee Tsavliris that they were entitled to avoid the contract all together because the mistake referred to was a fundamental element of the contract itself which it would not have entered into had such information been accurately available at the onset. In effect, Tsavrilis was relying on the doctrine in common law that was enunciated in Bell v. Lever Brothers2. In other words, Tsavliris contends that had an accurate distance of both ships been disclosed earlier, they would not have bound themselves in a contract with Great Peace since such fact was essential to their purposes. As an alternative remedy, Tsavliris argues that based on equitable grounds, the contract can still be rescinded on the basis of a mistake that renders the enforcement of the contract unjust even on the assumption that the common mistake was not fundamental to the contract. This position was based on the ruling and decision in the case of Solle v. Butcher3. By highlighting these two cases, the court, in Great Peace, was thus compelled to attempt to reconcile their apparent confusion. As for the statement under scrutiny, Ewan McKendrick declared, “the doctrine of [common law] mistake has been reduced almost to a vanishing point”. It is submitted that this statement is inaccurate and therefore disagreeable. The decision in Bell is firmly established in Great Peace. Lord Atkin, in Bell, put forth the principle that at common law, a mistake as to the quality of the service contracted for will not void a contract unless the mistake is concomitant in both parties "and is as to the existence of some quality whereby the thing without the quality essentially different from the thing that it was believed to be…”4. Basing on this principle, the common mistake must refer to a misapprehension of a fact that fundamentally alters the intent of both parties to the contract as to render it void. It is not merely a mistake as to the quality of the thing that is the subject matter of the contract but “something which both must necessarily have accepted in their minds as an essential and integral element of the subject matter.”5 This principle is also somewhat reiterated by Lord Denning in Solle when he postulated that “the Court had discretion in equity to set aside a contract that was binding at common law on the grounds of common mistake.”6 But Solle further confused the issue when it established that “a contract is also liable in equity to be set aside if the parties were under a common misapprehension either as to the facts or as to their relative and respective rights, provided that the misapprehension was fundamental and that the party seeking to set it aside was not himself at fault". In Solle, the contract that arose out of a common mistake can still be considered as valid under ordinary common law principles so to speak, however, such is rescindable in the justification of more liberal equitable grounds. In the above-mentioned cases, the parties to the contract simply acted upon a dilemma under a common mistake. But such an error, if fundamental and substantially alters the subject matter of the agreement or shall render the same impossible to comply with, should be considered void in law. Great Peace neither changed this postulate nor whittled down its importance in determining the proper remedy for mutual mistakes in contracts. The concept of an equitable remedy where there is a common mistake committed by both parties is the one that has been substantially restricted in its application. It was held where there was a common or mutual mistake that would raise difficult and important issues of construction and where it was possible to perform the contract but it was alleged that a mistake in relation to a fundamental assumption, which rendered performance of the obligation impossible (or on these facts impracticable) it will be necessary to determine this: 1. There must be a common assumption as to the existence of a state of affairs. 2. There must be no warranty by either party that that state of affairs exists. 3. The non-existence of the state must not be attributed to the fault of either party. 4. The non-existence of the state affair must render performance of the contract impossible. 5. The state of affairs may be the existence, or vital attribute of the consideration to be provided or circumstances, which must subsist if performance of the contractual adventure is to be impossible.5 The conditions spelled out in Great Peace would do away with the confusion attendant to Solle in relation to Bell. In fact, it effectively declared the impossibility of reconciling both cases on the basis of the impossibility of distinguishing the kind of common mistake that is fundamental to a contract and which renders it void at law from that which makes the thing contracted for essentially different from the thing that it was believed to be.7 Doing away with this confusion, Great Peace has limited the relief from contracts arising from common mistake to those that actually render these contracts void in common law owing to a fundamental misapprehension of a substantial fact. There is no more allowance for contracts that are valid in all respects but rescindable on equitable grounds based on mutual mistake. Simply stated, if a mistake is common to both parties to a contract and is fundamental to it, the contract will be void. But if the common mistake is not fundamental and thus making the contract a valid and binding agreement, the subsequent realization by one party that performance of the terms of the contract would be disadvantageous, would not release the adverse party from complying with its terms on the basis of equity. Although equity’s intrusion into the effects of the common law is still recognized where the case law rule is seen to work injustice, the circumstances surrounding Great Peace do not appear to justify this intrusion8. This is the essence of the case. There is no denying the fact that where common mistake occurs in a contract and the same passes the conditions laid out in Great Peace, its interpretation is that such a mistake has a relief in common law and not necessarily though equity. This was evident in the statement; “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 contract law.”9 The conclusion that can be reached is that mistake in common law is still recognized as a ground for the repudiation of a contract under certain conditions. It has not been “reduced to a vanishing point” as Ewan McKendrick would have it. In fact, it has been further clarified by Great Peace and the conditions for its application concretely defined. There is no more confusion between fundamental common or mutual mistakes that void a contract at common law from that which makes the same voidable at equity, the latter being called the “doctrine of common mistake in equity”10. The court is clearly moving towards a more restrictive application of remedies for such mistakes in contracts. No longer will it be tolerated that courts would have discretionary jurisdiction to grant relief when the circumstances seem just. This reinforces the concept of contracts being the sole responsibility of the contracting parties under the principle of caveat emptor. Equity can still step in but no longer to void an otherwise valid contract at common law but to deny specific performance of obligations that, under exceptional circumstances, will work injustice to one of the parties through no fault of theirs. References David Martin Clark Case Notes. Retrieved April 20, 2006 from the World Wide Web: http://www.onlinedmc.co.uk/'grmeat_peace'.ht Mutual and Unilateral Mistake in Contract Law, 22 Journal of Studies 309 (1993) (with Eric Rasmusen). Retrieved April 19, 2006 from the World Wide Web: http://islandia.law.yale.edu/ayers/mutual.htm Mistake in The Law of Contract, Mike Semple Piggot. Retrieved April 20, 2006 from the World Wide Web: http://www.lawinabox.net The Risk of Mistake in Contract - Common Mistakes in Law and Equity. Retrieved April 20, 2006 from the World Wide Web: http://www.alway-associates.co.uk/legal- update/article.asp?id=16 Read More