Advising Marcus of Any Issues Arising from Either Contract - Essay Example

Business Law A Legal Essay advising Marcus Submitted By: NAME: INSTITUTION: COURSE: INSTRUCTOR: DATE: © 2015 Advising Marcus of any issues arising from either contract This legal essay advises Marcus Karkharoff who signed a sale contract with Luiggi’s Shipping Company, in which the latter party purchased the ship called Moskva at a price of $15 million, an amount Marcus received on the same day of signing the contract. However, Moskva had been sunken some days earlier after catching fire and suffering irreparable damage, a fact unbeknown to both Marcus and Luiggi’s Shipping Company. This essay endeavours to prove that, under Australian Contract Law, a mistake of fact occurred which rendered the contract non-binding to both parties, and that the contract was also consigned to void by common law, with the effect that Marcus would be legally advised to repay Luiggi’s Shipping Company. Before advising Marcus, it is necessary to discuss the relevant elements of a typical contract in order to understand Marcus’ contractual standing based on the scenario in which he found himself. In order to put the advice in its right perspective, it is also necessary to briefly explain what constitutes a mistake in contract law as well as the distinction between mistake of law and mistake of fact1. A mistake in contract law is a flawed belief, in the time of contracting, that some facts are true while they are not. A mistake can be raised as a defence, and if successfully argued, may lead the contract to be rendered void ab initio i.e. voidable in which case the court may provide the so called equitable remedy2. In common law, there are three types of mistake as far as a contract is concerned. These include: ‘common mistake’, ‘mutual mistake’ and ‘unilateral mistake’3. The difference between the ‘mistake of fact’ and the ‘mistake of law’ is very significant, particularly for the purposes of this essay. Furthermore, the distinction between ‘mutual mistake’ and ‘common mistake’ is also important. The mistake of law occurs when a party is involved in a contract without the proper knowledge of the requisite law of the country under which the contract falls. The contract is, therefore, affected by this mistake of law, although the mistake does not render the contract void because ignorance of law is considered as a ‘no-excuse’ in law. On the other hand, a mistake of fact is said to occur when both parties enter into a contract under a certain “mistake concerning a matter of fact that is essential to the contract”. In this case, the contract is void. McRae v Commonwealth (2014) as cited by4 illustrates this point. “X agrees to purchase a horse from Y”. However, it turns out that, as a matter of fact, “the horse was already dead by the time X and Y entered into the bargain”, although none of the two parties was aware of this fact. In such a case, the contract is void. A mutual mistake occurs “when the two parties who have entered into a contract make a mistake regarding the same material fact in their contract”, so that although ‘their minds meet’, both parties “have been mistaken”. Additionally, a mutual mistake will occur when the “object the parties have mistaken is material” i.e. ‘there must be material mistake regarding a material aspect in the contract’5.This author notes that mutual mistake is easily confused with mutual consent as occurred in the Raffles v Wichelhaus. In this case, there was a “contract to ship goods in a vessel called Peerless, but both parties were referring to a completely different vessel” (as cited in6). Therefore, both parties had different understanding so that they could not communicate cohesively about when the goods should be delivered. On the other hand, a common mistake occurs when both parties in a contract “hold on to the same belief of facts” – a belief which is mistaken. In a case of House of Lords, Bell v Lever Brothers Ltd (cited by7), it was established fact that “common mistake can render a contract void if and only if the subject matter of the mistake is satisfactorily fundamental to change the nature of the contract as to render the performance of such a contract impossible”. A contract is a promise or a set of promises that is legally binding. In this context, a promise is an undertaking by one person to do something or refrain from doing something if another person does something or refrains from doing something or makes a promise in return (). While a contract has six basic elements including: Offer and acceptance; Intention to create legal relations; Consideration; Legal capacity; Consent; Illegal and void contracts8, the most relevant element in this case is consent, in which each party involved in the contract must exercise its free will and demonstrate proper understanding of what it is doing. However, it is evident from ACL that proper consent could be affected by one or more of these matters: ‘false statements; mistake; unconscious ability or undue influence; and duress’9. Furthermore, the same source10 stipulates that a mistake may cause a contract to be un-binding to the parties if the mistake touches on the very basis of the contract. For instance, where the contract involves a sale of a car in which the contractual parties assume to exist, when, in reality the car has already been destroyed by fire, the contract is rendered non-binding on both parties11. Evidently therefore, a mistake occurred when Luiggi’s Shipping Company entered into a financial contract with Marcus to purchase Moskva for $15 million when both parties were not aware that the ship had already been irreversibly destroyed. This source12 further asserts that certain contracts are rendered void under common law in so far as the contract is contrary to the public good. In this case, the offending part of the contract can be severed from the rest of the contract. For example, as a matter of fact, it is surely illogical to pay for a non-existent item! The remedy is that the property or money transferred in the contract rendered void in common law should be recovered. This is because if the contract is void, it means there is no contract, in which case the parties involved need to be resituated back to their original status13. It is evident from the background facts of the transaction between Marcus and Luiggi’s Shipping Company that the main focus is mutual mistake, where the two parties to the contract have the same erroneous belief that Moskva exists, when in reality, it had already been destroyed. A doctrine of mutual mistake “may appear puzzling!”. For instance, one may ask, is it not more efficient for a “caveat emptor to apply so that the buyer bears the risk of mistake”? If this were the arrangement, would it not encourage careful and more informed negotiations in a contract? These questions notwithstanding, the author of this essay makes it clear that in bargaining situations, “where the transacting parties may have incentives to misrepresent a product’s quality, or where efficient retrieval of information on the product is an issue”, the enforceability of the contract may be hampered14. Although the general public has vested interest in ensuring that contracts are enforced, contract law however, may extend beyond the mere enforcement of bargains. In particular, certain rules that govern enforcement of bargains “create efficient incentives for production and disclosure of information and provide for optimal risk allocation”15. In this context, we identify three advantages of the mutual mistake doctrine relative to its converse. First, by providing a means to rescind a contract, the doctrine motivates transactors to reveal what they know in bargains where information may be asymmetrically held. As such, this doctrine changes issues that pertain to “knowledge of essential facts” to issues that pertain to “a party’s duty to disclose such facts”16. Secondly, we should allow for the eventuality that either seller or buyer or both may have other incentives. With reference to the applicable case law and based on the pertinent facts established above, this article has satisfactorily identified the essential elements and most appropriate section of contract law that is required to argue a ‘mutual mistake’ case for both Marcus and Luiggi’s Shipping Company where the former would be advised to pay back to the latter the amount of $15 million. This is so because this essay has effectively shown that the case arises from neither a ‘mistake of law’ nor a ‘common mistake’ but rather from ‘mistake of fact’ and ‘mutual mistake’17. For these reasons, Marcus would be advised to pay Luiggi’s Shipping Company back her money because this would be the eventuality if the latter were to seek a legal redress. BIBLIOGRAPHY Articles and Books Elliott, C and Quinn, F. Contract law. Harlow: Pearson Education, 2013. Finch, E and Fafinski S. Tort law. Harlow, England: Pearson, 2015 Gamble, Roger., Jean Du Plessis and Luke Neal. Principles of Business Law. Thomson Lawbook Co, 2008. McKendrick, Ewan. Contract law: text, cases, and materials. Oxford, U.K.: Oxford University Press, 2012. Cases Bell v Lever Brothers Ltd [1932] AC 161 Raffles v Wichelhaus [1864] 2 Hurl & C 906 Court of Exchequer Read More