Doctrine of Mistake in Common Law - Case Study Example

Mistake This piece is looking at the doctrine of mistake in common law and support Ewan McKendrick 's position that the Great Peace Shipping v Tsavliris Salvage Ltd1 case has reduced the doctrine of mistake to a vanishing point. "If mistake operates at all, it operates so as to negative or in some cases to nullify consent"2 Caveat emptor ("let the buyer beware") is the basic underlying principle in the law of contract. The situations in which a contract will be avoided on the ground that one or both parties have made a mistake will be somewhat limited. However, cases have shown that in certain circumstances a contract may be void in common law on the ground that there was a mistake. In some other cases even when the contract is valid in law, it may be rendered voidable in equity on the ground of mistake. The general thinking used to be that mistakes could not be operative in law until in case of Kleinwort Benson v Liverpool City Council3 when the House of Lords declared that this rule is not part of English law. Treitel4 has considered the laws relating to mistake under five headings: Common Mistake; Mutual Mistake; Unilateral Mistake; Mistake as to Identity; Mistake Relating to Documents. While commentators are not agreed as to the classifications of Mistake, Treitel5 in his book; The Laws of contract, 11th edition, deals with Mistake by contrasting Mistake nullifying consent (Parties reach agreement which is based on a fundamental mistaken assumption) with Mistake negativing consent (Where mistake prevents the parties from reaching an agreement e.g. where they intend to contract about different things). Some commentators have gone on to divide mistake into two parts, that is, common mistake shared by the parties, and mistake in communication. In a common mistake shared by both parties, although both parties apparently in agreement, have entered into the contract on the basis of a false and fundamental assumption. It is called common mistake since both parties make the same mistake. The contract is not necessarily void at law in these circumstances. In the case of Bell v Lever Brothers Ltd.6, definition of common mistake in contract law was made. During March of 1929 the Niger Company, which dealt in trade in the western African area, was merging with a rival company and wanted to get rid of two employees Mr. Bell and Mr. Snelling, who were hired as chairman and vice-chairman of the company. Chairman D'Arcy Cooper on behalf of Lever Brothers7 made a deal with Bell and Snelling to leave the company in exchange for a sizable compensation (a "Golden handshake8"). At the time of the agreement both parties believed that the employment contract had not been breached and thus the company would not have been able to terminate Bell and Snellings' employment under any other circumstances. It was later revealed that there was in fact grounds for termination at the time of the agreement as Bell and Snelling had used their positions to make a secret profit for themselves. Lever brought an action claiming recission of the compensation agreement because of mistake of fact. At trial the jury found that Bell and Snelling's illicit dealings breached the employment contract and that if the Lever Brothers had known they would not have entered into the agreement. Furthermore, the jury found that at the time of the agreement Bell and Snelling did not have in mind their illicit acts. Lever Brothers pursued the case vigorously as it considered the behavior of Bell and Snelling simply unacceptable. To appreciate this legal battle you have to understand the background of the personalities involved. Francis D'Arcy Cooper - a senior partner with his uncle's accountancy firm Cooper Brothers and staunch Quaker9 - became chairman of audit client Lever Brothers in the early 1920s. He was hired by Lord Leverhulme10 when the banks were threatening to call the loans on the company due to devastating losses incurred by the newly acquired Niger Company that crippled Lever Brothers. Cooper arranged financing from Barclays Bank under the condition that professional management would be put in place at the Niger Company. Ernest Hyslop Bell - a personal friend of D'Arcy Cooper and senior manager at Barclays - was hired in 1923 to be chairman of the Niger Company. Snelling was appointed vice-chairman. He was an independent tax consultant who had previously turned a large tax claim into a tax refund for Lever Brothers in 1921 at a time when the company was strapped for cash. After Bell and Snelling reversed the Niger Company fortunes it was merged with its previously dominant competitor African and Eastern to form the United Africa Company. Bell had fully anticipated he would be asked to lead the newly merged company until Mr Cooper informed him otherwise which greatly upset Bell as he had left a safe job at Barclays Bank, had turned around the business to the point where it could be merged on equal terms with its main competitor and at 54 years of age was too old to get another position in the City. It was agreed they would get a sizeable compensation package that would allow Bell to retire. Shortly after their resignation it was discovered that Bell and Snelling had traded on inside information obtained from the cocao cartel about impending price reductions by selling cocao forward for their personal account. The House of Lords found that there was no mistake and the contract could not be recinded nor was it void on mistake. The Court identified the mistake as a common mistake: A mutual mistake as to some fact which, by the common intention of the parties to a contract, whether expressed or implied, constitutes the underlying assumption without which the parties would not have made the contract they did, and which, therefore, affects the substance of the whole consideration, is sufficient to render the contract void.11 Effectively, the mistake must nullify or negative consent of the parties in order for the agreement to be void. In order for the contract to be void by mutual mistake the mistake must involve the actual subject-matter of the agreement and must be of such a "fundamental character as to constitute an underlying assumption without which the parties would not have entered into the agreements". From the facts the Court found that the mistake as not sufficiently close to the actual subject-matter of the agreement. The parties got exactly what they had bargained for. The case put a high standard on the finding of common mistake. This was criticized in the later cases written by Lord Denning such as in Sole v Butcher12 where Denning reduced the standard in order the make the agreement voidable on common mistake. Subsequently in Great Peace Shipping Ltd v Tsavliris Salvage (International) Ltd13 the Court of appeal overturned Denning and set the standard for common mistake in line with the original Bell v Lever Brothers standard Where it is seen that a contract is not valid at common law on the ground of mutual mistake (e.g. existence of the subject matter, title and quality) the court, can exercise its equitable jurisdiction, and refuse specific performance of the contract. Otherwise, the court may reverse any contractual obligation between the parties involved, and so as to do justice between them, impose terms to be met. In Cooper v Phibbs, the house of lords set aside the lease, and imposed a requirement that the "lessor" should have a lien on the fishery for such money as he had spent on improvements during the time he wrongly thought it belonged to him. The case of Solle v Butcher14 set a new standard in that the Court of Appeal defined a new doctrine of common mistake in equity under which gave the courts a discretionary jurisdiction to grant such relief as in the circumstances seems just. It should be noted that one of the greatest legal minds of our time, Lord Denning, was involved in this decision. However, in Great Peace Shipping v Tsavliris Salvage Ltd15 (The Great Peace16), the Court of Appeal overturned this ruling and declared that where the contract is valid at common law, there is no jurisdiction to set it aside in Equity. In the case of The Great Peace, the defendant owned a ship which was in trouble. Both defendant and claimant believed The Great Peace was close to the ship in trouble. This was however not the situation. The defendants discovered that the Great Peace was not close to the ship in trouble and cancelled the contract because The Great Peace would take longer to get to where it was needed than the charterers had anticipated. The owners of the Great Peace, who are the claimants, demanded for a cancellation fee which the defendants refused to pay. The owners succeed, on the basis that the contract, although a bad deal for the charterers, was possible to perform, and contained no warranty about the relative position of The Great Peace to the ship in trouble. The Court of Appeal refused to set aside the contract in the case of The Great Peace and has thus effectively, though not formally, overruled the decision in Solle v Bucher17. The Court believed that the test for whether a contract is void for mistake is in Bell v Lever Bros18, and declared that the idea in Solle v Butcher that there is an alternative, equitable ground for 'setting aside' a contract for mistake is inconsistent with Bell v Lever Bros, and is wrong. This decision of the court of appeal according to Ewan McKendrick19 has reduced almost to a vanishing point the doctrine of mistake in common law, and I am in total agreement with him. As shown earlier, the case of Solle v Butcher broke new ground in law. It created a new doctrine: the doctrine of Mistake. The Great Peace judgment thus overrules the application of this doctrine and it will now be a reference point by virtue of precedence for other buyers to claim damages irrespective of mistake. This judgment made reference to the case of Bell v Lever Bros which it decided was the benchmark for measuring mistake. But the doctrine of mistake was created in the case of Solle v Butcher and was an extension of the definition of mistake which the case of Bell v Lever Bros defined. I believe that the judges that made the judgment in the Great Peace case erred when they said that: "the test for whether a contract is void for mistake is in Bell v Lever Bros, and the idea in Solle v Butcher that there is an alternative, equitable ground for 'setting aside' a contract for mistake is inconsistent with Bell v Lever Bros, and is wrong". From the afore explained it will be seen that now the doctrine of mistake in common law in contracts may as well be expunged from the English law as a precedence has been set for its in applicability by the judgment of the court of appeal in the Great Peace20 case. What the Bell v Lever Bros case did was to set a standard for determining mistakes, but the judgment written by Lord Denning in Solle v Butcher case actually created the doctrine of mistake in common law in contracts. In conclusion, the great peace judgment has overturned the ruling of Lord Denning that set up the doctrine of mistake in common law. Since it preferred the use of definition of mistake in accordance to the Bell v Lever Bros case. This makes it difficult to plea using the doctrine of mistake in arguing cases. References 1. MacMillan, C. "How temptation led to mistake: an explanation of Bell v Lever Brothers, Ltd" Law Quarterly Review 2003, 119(OCT) 625-659 2. All England Law Reports 909 3. Ewan McKendrick ; Contract Law: Text, Cases, and Materials; oxford, 2nd edition, 2005 4. Treitel, Guenter H., Sir; Law of Contract; Sweet & Maxwell, 11th Edition, 2003 5. All England Law Reports 907 6. F H Buckley, The Fall and Rise of Freedom of Contract; Duke University Press, 1999 7. Appeal Court Report 919 8. G.O. Kodinliye, Nigerian Law of Contract, Spectrum Press, 1992 9. Oliver Wendell Holmes; The Common Law; Courier Dover Publications, 1991 10. Mistake, Fraud and Duties to Inform in European Contract Law; edited by Ruth Sefton-Green; University Press, Cambridge, 2005 11. Roger LeRoy Miller, Gaylord A Jentz, Fundamentals of Business Law; Thomson West, 2004 12. Barry S Roberts, Richard A Mann; Business Law and the Regulation of Business; Thomson West, 2004 Read More